Actual revenues were significantly lower than his projections suggested—they should have been 50% higher. “As a business we saw revenues drop, we reacted accordingly,” he recalls. “We cut costs, renegotiated contracts with vendors, eliminated services, and brought the services we could in-house. We cut employees who were not pulling their weight and had people doing more than one thing. Rather than laying people off, we decided to fall a month behind on paying the lease for two of our offices. And that’s how tight things got.”

Cancryn says he figured things would get better and the next month, he would just double-up on the payment. But things did not get better, so he was forced to lay off six employees over the course of the next two years. “It was a last resort.”

While layoffs, salary cuts, and furloughs can help some small businesses stay afloat during an economic downturn, living through it can be traumatic— causing feelings of anger, anxiety, insecurity, and a sense of betrayal for those who are let go as well as for those employees who remain on the job. And, like Cancryn, business owners may feel a personal sense of failure for having to take such measures. Left unchecked, any of these negative emotions can wreak havoc in a workplace already weakened by financial crises.

“The first casualty is usually morale, quickly followed by performance and retention of top talent,” says Chris Bryant, founder, executive coach, and national speaker of Beverly Hills, California–based Rapport Strategies Group. With fewer resources, small business owners must face these difficult times and make hard choices.

In doing so, they regrettably have to manage the results. According to a 2007 study conducted by the global professional services firm Towers Perrin, there is a strong connection between employee engagement and company financial performance (see charts). In Closing the Engagement Gap: A Road Map for Driving Superior Business Performance, engagement is defined as employees’ willingness and ability to contribute to company success. Findings conclude that “the more engaged the workforce, the better the company is likely to perform on a range of key financial metrics.” With a direct correlation between ­productivity and employee morale, a solid confidence and engagement throughout your company—from the top down as well as the bottom up—is necessary if you intend it to increase profitability and thrive.

All Together Now

“First, be aware that what it takes to motivate employees during a downsizing period is different than during a period of growth,” says Bryant. In times of prosperity, employees basically feel grounded and can focus on their daily tasks. But these days your employees are likely to be distracted and disengaged by the reports of “doom and gloom” bombarding the airwaves and the rumors swirling around the office at work. Now, more than ever, they are looking to you for positive leadership and reassurance.

For example, one of the most powerful things you can do as a leader, to show your employees your loyalty toward them and usher in an environment of camaraderie, is to be the first person in the company to take a salary cut. “If you take this step, they are sure to follow if they care about saving the company and preserving a job for themselves later,” says Adrienne Graham, chief talent acquisition consultant and CEO of Hues Consulting & Management Inc. in Alpharetta, Georgia.

It’s also important to let employees know that it requires a team effort to get through the tough times, according to Tanisha Russell Day, managing consultant of KEY HR Consulting L.L.C. (www.keyhrconsulting.com) in Teaneck, New Jersey. “When they see you roll up your sleeves and assist with duties outside of your core responsibilities, that will promote teamwork and boost morale.”

Communication is critical during times like these. Pretending things are OK or keeping silent about the state of the company are big mistakes. “Before this recession you could just tell your employees how things were going to be done. Today, you need to ask them to participate,” says Douglas Duncan, a 30-year human resources veteran and president of Maplewood, New Jersey-based Your HR 9-1-1.com.

For example, when you are looking for places to cut costs, instead of singling out one department to take the brunt of it or making across-the-board cuts, ask your people where they think they can save the company money or what revenue-generating ideas they may have, such as utilizing free or low cost Web conferencing systems such as Skype or telecommuting to save money on utilities. “If you ask them to cut back, you cut back as well and show them. It could be carpooling to work, converting travel meetings to Web conferences, or bringing in your lunch. You can scale back on expensive items and client entertainment expenses,” says Graham. “Whatever you choose to do, make sure your staff knows about it.”

During an economic downturn, employees often feel high levels of stress and powerlessness—a toxic combination. It’s up to you to remind them that you are all invested in the success or failure of the business together. Making the effort to invite each employee into the fold during formal and informal settings and giving them the opportunity to contribute to the continued success of the business in new ways can calm fears, create a sense of camaraderie, and enhance productivity.

Letting Go Gracefully

Cancryn says he didn’t want any of the employees he fired—mostly support staff he interacted with on a daily basis—to feel betrayed. So, before letting anyone go, the 49-year-old exec spoke to each of them individually so they would know their positions were in a vulnerable spot. “I told them where we were as a company, I shared my decision-making process about the layoffs, and I also gave them a chance to give me their feedback,” he recalls.

“They weren’t really surprised by the news because they already knew what was going on in the economy and they could see that the work just wasn’t there for them the way it had been in prior years. But, I think they appreciated the communication because they still came to work, they did a good job, and most weren’t speaking negatively about me or the company itself.”

Experts applaud Cancryn’s approach, noting that open communication with employees about pending layoffs is a key ingredient to keeping morale high. “If you know a lot of people are going to be laid off, it’s better for everyone to hear about it as much as possible beforehand,” says Russell Day. A failure to communicate openly and honestly with employees can be a recipe for disaster.

Layoffs may be necessary to help your company’s bottom line, but a poorly managed execution is a distraction that can burn bridges, destroy morale, and hinder productivity. If you must terminate an employee, do so with kindness, honesty, and respect—for the good of that individual, the morale of the co-workers they are leaving behind, and your company’s reputation. How you operate during these tough times will impact how well you move forward once they’re behind us.

This story originally appeared in the July 2009 issue of Black Enterprise magazine.

When an employee is furloughed, he/she is required to take a day off without pay. Although furloughs don’t always save as much money as layoffs, they prevent employers from terminating members of a skilled and valuable workforce. With the number of unemployed in the U.S. reaching 14.5 million in May, news that a company will require its employees to take time off without pay may be inconvenient, but compared to a pink slip it is welcome news to most.

Nathaniel Alston, a former national president and a founder of the National Association of African Americans in Human Resources, thinks that furloughs create less dissension than pay cuts and that employees feel like furloughs are temporary. “‘Furlough’ even sounds better than ‘pay cut,’” says Alston, CEO of the Horizons Group, a Maryland-based human resources consulting firm. With a pay cut, he explains, employees are left with the feeling that they’ll never get their previous salary back.

Stillman College designated two furlough days in March, and employees will also be furloughed for two days near the July 4 holiday weekend. This strategy will allow the school to dramatically reduce its energy consumption and the campus will be closed for several days during the hottest time of the year. McNealy anticipates that the July furlough will save $500,000. The furloughs along with other cost-saving methods (utilities abatement and reduced travel) will allow the school to fill a $1 million shortfall.

Take note of Alston’s advice to employers and employees on how to smoothly and effectively implement a furlough program.

ADVICE TO EMPLOYERS

Communicate. Explain to your employees that after calculating all of the options, a furlough is the best decision. McNealy and Stillman College’s chief financial officer spoke with the chairs of the academic departments and staff managers to keep the HBCU’s workforce apprised of the college’s financial situation.

Define the terms of the furlough and make sure that employees have an opportunity to ask questions. “Involve your senior human resources person and the head of the company,” says Alston. “Tell them that instead of laying off 50 people, we are going to furlough 200 people but everyone will keep their jobs, and tell them how we’re going to accomplish that.”

Consider a tiered furlough system. Try to reduce the economic burden on lower paid employees by implementing a tiered furlough system that will give higher salaried employees more days off without pay. “Usually, the people who are highly compensated can make out [okay] on a furlough,” says Alston.

Give ample notice. Try to plan furlough days well in advance to give employees enough time to prepare financially, advises Alston. Spread the furlough days across a period of time instead of insisting that they all be taken during one pay period. McNealy alerted his staff and faculty about the furlough plan in February and scheduled furloughs in March and July, which allowed for a break between decreased pay periods.

Don’t force employees to work. Employers must make sure that they abide by the federal Fair Labor Standards Act (FLSA). Non-exempt (hourly) employees can be easily furloughed, but exempt or salaried employees are entitled to full weekly salaries for any week they perform work, even if it is less than a day’s work. As such, employers can only furlough exempt employees for an entire week, not day by day.

Despite the law, some employers make employees feel obligated to work on a furlough day. Alston highly recommends that HR departments enforce furloughed days within FLSA guidelines and reduce the risk of workers compensation problems.

ADVICE TO EMPLOYEES

File for unemployment insurance. Eligible furloughed employees can apply for unemployment benefits depending on the state they live in. Be diligent about understanding when and how to file, says Alston. In most cases, payments are not retroactive. For more information, visit your state’s unemployment office or contact the U.S. Department of Labor.

Get paid or gain experience. If it won’t strain your wallet, consider using your time off to volunteer or pursue another professional development. Take a class, obtain certification for a skill set, or volunteer your professional services to keep your faculties sharp. If money is an issue, seek out freelance, consulting, or part-time work to make up for lost income. Or use this time to start your dream business.

Relax, and conserve money and energy. For most, this isn’t a time to spend a ton of money—throwing a big backyard barbeque for all of your friends and family, or taking an extravagant three-day-weekend vacation. Alston suggests that you think of your furloughed days as a time when you will be able to save money on gas, food, and other incidental expenses that occur throughout the workday. Finally, relax and enjoy the benefit of having a day off so that you will have plenty of energy to face the mountain of tasks that will pile up while you are gone.