The Flawed logic of bottom 5% layoffs
Why performance based, mainly the so called "bottom 5%" hurts companies?
In the U.S., especially if you are in the tech sector or watching it, you know the term layoff. Typically, we gloss over it as long as we are not impacted. We just read it as news. The more we hear and read about it over the last few decades, we get numb to such topics.
For example, we read, “Google sent out pink slips in an email at 2:00 AM and their badges stopped working”. BTW this was rephrased based on what we saw a few months ago and also taken as an example, with no motives. Another example is, “Amazon is planning to lay off xx, xxx people and mostly at the middle management level”.
I have my take on this entire layoff situation, though it is framed so well to appeal to Wall Street. I am not going to go over my understanding or belief about layout/reorganization/restructuring, etc. Here is the kicker….who tells them how and when to lay off? It is a large-scale “management consultant” organization. Isn’t it a joke? Steve Jobs expressed his opinion about those entities in an interview, and it summarizes it all.
Let’s come back to the topic. What is a Layoff?
A layoff is when a company terminates employees due to business reasons rather than individual performance or misconduct. Layoffs typically happen due to:
Cost-cutting measures (e.g., financial struggles, budget reductions)
Business restructuring (e.g., mergers, reorganization)
Project or business closure (e.g., shutting down a division or product line)
Economic downturns (e.g., recession, market shifts)
Unlike firings, which are based on performance or behavior, layoffs are usually not the employee’s fault. Some layoffs are temporary, where employees might be rehired later, while others are permanent.
The above is a general story that’s woven around getting rid of people, who were hired in anticipation of growth. Of course, we know this is not the employee’s problem, but in a society that is built of “at-will employment”, it works both ways.
Performance-based firing
Now let us come to “performance-based firing”. What exactly is it?
We all know that in a given team, everyone is expected to be good performers who go above and beyond in meeting expectations. If we have weak links, we cannot expect good growth from the entire team. I have used the word “growth” in loose terms. It could mean performance, timely meeting of schedule, quality of work, reducing stress, etc. If a few of the team members do not provide the desired output and are not willing to learn and work with others (whatever may be the reason), it hurts not only the bottom line but also the morale of other team members. They end up taking additional roles and responsibilities to keep the team’s flag flying high. In such situations, it is understandable that the employee(s) is given a PIP, and the performance is watched over the next say 6 months, and then if desired results are not achieved, they are let go. This is called performance-based firing.
Corporates have come up with this magic word: “bottom 5% performers”. At the outset, it sounds logical, doesn’t it? In a given team, you identify bottom performers and then work on the next steps, which may be leading up to the termination of their employment. In general, it sounds and works as intended. Is it made to work that way? NO. It is used as a ritual for the so-called “cleaning house.” If the company is not able to grow its top line, they start playing with knobs, including salaries. All of a sudden once a layoff is announced and executed, Wall Street is happy and responds positively and the stock value goes up. Then the company goes back to hiring again, often by paying less than before.
Why is the bottom 5% performance category for layoff a flawed strategy?
The argument for laying off the bottom 5% of performers every year is flawed for several reasons:
⚠ Assumes Performance is Static – People’s performance fluctuates over time. A single bad year doesn’t mean an employee is permanently underperforming. Growth, learning curves, and changes in work conditions can impact performance.
⚠ Ignores Context – Performance is often measured in relative terms, and the bottom 5% may include individuals working in tougher roles, dealing with organizational inefficiencies, or contributing in ways that aren't easily quantifiable.
⚠ Demotivates Employees – If employees know that the lowest 5% will be fired regardless of absolute performance, it creates a fear-driven culture. This discourages collaboration, innovation, and risk-taking, as people focus on survival instead of contribution.
⚠ Creates a Perpetual Cycle – Over time, as the lowest 5% is removed, the next group of employees will fall into that category, even if they are performing at an acceptable level. Eventually, you end up firing competent employees who are simply ranked lower.
⚠ Destroys Team Morale – Consistently laying off a portion of employees based on ranking fosters distrust and anxiety, leading to disengagement and reduced productivity among those who remain.
⚠ Encourages Unhealthy Competition – Employees may start sabotaging colleagues, hoarding information, or engaging in political maneuvering to avoid being in the bottom 5%, rather than focusing on teamwork and shared success.
⚠ Overlooks Long-Term Potential – Some employees may take longer to develop but eventually become top performers. Arbitrary cuts prevent long-term investment in talent.
⚠ Performance Metrics are Subjective – Many jobs don’t have clear, objective performance metrics, and evaluations can be biased based on personal relationships, manager preferences, or flawed assessment methods.
⚠ Ignores External Factors – An employee’s output can be influenced by market conditions, leadership decisions, or changes in company priorities—things beyond their control.
⚠ Doesn’t Address Systemic Issues – If performance problems persist, it might be due to poor management, lack of resources, or flawed processes rather than individual employees. Firing people doesn’t fix underlying organizational problems.
Instead of rigidly laying off the bottom 5%, a better approach would be to invest in training, mentorship, and process improvements while addressing systemic inefficiencies that hinder performance.
Now that we understand a blind bottom 5% performance-based layoff is wrong, let’s look at how some companies package restructuring by calling them a performance-based layoff
Some companies justify restructuring by laying off the bottom 5% of performers for several reasons, but this approach is often flawed. Here’s why they do it and why it may not be the best strategy:
Why Companies Announce It This Way:
💥 Framing Layoffs as Performance-Based – Instead of admitting financial struggles or leadership failures, companies claim they're cutting “low performers” to make it seem like a merit-based decision.
💥 Stock Market & Investor Optics – Investors may react better to “performance optimization” than to “cost-cutting layoffs” driven by poor business outcomes.
💥 Justifying Workforce Reduction – Instead of acknowledging over-hiring or poor strategic planning, companies shift the blame onto employees.
💥 Deterring Employee Backlash – It’s easier to justify firing “underperformers” than admitting broader financial or structural issues.
💥 Following Forced Ranking Systems – Some companies use stack ranking, which mandates ranking employees from best to worst, forcing managers to label someone as the “bottom 5%” even if they are competent.
The forced ranking system as a whole is flawed. In the bottom 5% or out of the desired range, the type of parameters can be applied to parts made in production. We call them tolerances like +/- 5mm. It means if a part is intended to come in at 100mm and there is a tolerance of +/- 5mm on the dimension, anything outside of this band of 95mm - 105mm is termed as “out of spec” and is rejected. It cannot be forced to fit into the human system, where individuals are different, and collectively, a team can deliver more.
Why This Approach is Flawed:
It assumes performance is absolute rather than contextual (e.g., resource constraints, team dynamics).
It creates a culture of fear rather than fostering development and growth.
It ignores systemic issues like poor management, unrealistic goals, or external market changes.
It can lead to losing valuable employees due to flawed or biased evaluation methods.
It does not guarantee company success, as layoffs don’t inherently fix deeper business problems.
Better Alternatives:
Address leadership and strategic failures rather than blaming employees.
Invest in training and performance improvement rather than resorting to constant cuts.
Restructure based on real business needs, not arbitrary performance quotas.
Laying off the so-called “bottom 5%” is often more about optics than effectiveness—a short-term fix that may harm long-term growth.
In the news:
Meta announces 5% cuts in preparation for ‘intense year’ — read the internal memo
Meta is set to cut about 5% of its workforce, focusing on the company’s lowest-performing workers, CNBC confirmed Tuesday.
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Disclaimers:
"The opinions expressed in this article are my own and are based on my interpretation of the news. This is not meant to be a definitive account of events but rather a perspective intended to spark thought and discussion. While I strive for accuracy, news evolves, and details may change. Readers are encouraged to review multiple sources and think critically before forming conclusions."
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