How do companies decide who to layoff?

Layoffs rarely begin with names on a spreadsheet. They begin with a reckoning. When leaders face a shrinking runway or a strategy that no longer fits the market, the first decision is not about people but about purpose. What is the company still committed to build in the next year, and what must it be brave enough to set aside. Without that clarity, any conversation about headcount becomes political by default. In expansion years, teams hire to keep options open. In correction years, survival depends on funding the few commitments that keep customers, protect margin, or generate revenue with high probability. Only when this anchor is set does the question of who stays and who goes enter the room.

The next decision is about work rather than titles. Companies that navigate contractions well map the work required to deliver the narrowed plan. They ask which skills are essential, at what level, and in what cadence. An experienced director who can unlock a key account may be more valuable than several junior hires who need long ramp times. A mid level engineer who keeps production stable and ships small features every week may be more critical than a celebrated architect whose output is slow or abstract. When leaders skip this work map, they overvalue hierarchy and undervalue capability, which leads to the wrong cuts and a longer recovery.

With a clear purpose and a map of required work, finance partners step in with sober math. They model the new burn target, severance obligations, and the cash runway across scenarios. Local context matters. In Singapore, norms around notice periods and severance make timelines more predictable. In Saudi Arabia, labor law and sponsorship obligations require additional planning. In Malaysia, smaller startups sometimes underestimate how partial cuts can create rework that later forces rehiring at a higher cost. The goal is not a shallow trim that buys a few months. The goal is a deep enough reset to make the remaining team confident that this will be the last cut. Morale recovers faster when people believe they can breathe and rebuild without another wave around the corner.

Only after these steps do individual names appear. The primary filter is role criticality to the forward plan. The second is versatility. In a smaller company, players who can cover multiple lanes without burning out become essential. The third is performance trajectory in the context of the new plan. Leaders should judge current momentum against the few metrics that now matter most. A high performer in a deprioritized product may still be let go. A steady operator in a core function may stay. These calls are painful, and they are not a verdict on human worth. They are a reflection of alignment between the new design and the skills on the bench.

Quiet forces often shape the conversation. Tenure bias is real. Founders sometimes protect those who were present at the start. The antidote is the work map on the wall and one tough question. If this person left tomorrow, what would break within two weeks. Friendship cannot be the answer. There is also the issue of risk concentration. If only one person knows how to manage a critical relationship or system, leaders may retain them while immediately training a backup. That choice is not favoritism. It is risk control that prevents a second crisis.

Culture influences the process as well. Some companies rely on private manager scores and hope that averages will produce fair results. This approach often erodes credibility because ratings can mirror politics. Healthier teams use open calibration sessions where leaders challenge assumptions with evidence. The strongest versions include a final review by someone outside the reporting line who tests three questions. Is each decision tied to the forward plan. Are similar roles held to the same standard across markets. What signal will this send to the people we want to retain. If any answer feels fuzzy, the team pauses and tightens its reasoning before proceeding.

Regional dynamics add nuance. In Singapore, redeployment within multinational groups can soften the impact if leaders plan early. In Malaysia, where networks are close knit, the way departures are communicated travels quickly and can affect future hiring. In Saudi Arabia, founders must balance transformation goals with national talent mandates and visa logistics. None of these realities justify vague messaging. They demand precision and planning.

The one part leaders fully control is the story they tell. Not spin, but clarity. People can accept hard news when the narrative holds together. Leaders need to explain what changed in the market or the model, define the new plan in plain language, and describe why this design requires fewer people and which capabilities remain vital. They should acknowledge that strong colleagues are affected despite doing nothing wrong. Ownership matters. Pointing fingers at the board or the economy undermines trust. The leader’s job is to carry the decision and honor the dignity of those who carried the company to this point.

Execution matters as much as reasoning. Speed and completeness prevent leaks and confusion. Affected teammates deserve to hear the news directly from their manager with a human resources partner present. Terms should be clear. Benefits continuation, job search support, and practical help such as references or portfolio reviews make a real difference. The internal note must be written before the external one, and the remaining team should not hear secondhand. In the all hands, leaders should make room for grief and questions. Pretending that nothing significant happened breaks trust faster than any cost cutting.

When choices grow tight between two strong contributors, design should guide sentiment. Leaders should choose the person whose skills compound the team. The one who lifts others without a title. The builder who documents, teaches, and reduces key person risk. In a downturn, quiet multipliers are priceless. They stabilize delivery, preserve institutional knowledge, and create the conditions for the next chapter.

A common suspicion is that companies use layoffs to conveniently remove underperformers. Any reset will surface low performance, but serious companies do not weaponize a downturn to avoid feedback. They have already set expectations and coached where possible. When cuts happen, those cases may be included, not because it is convenient, but because the new plan cannot support long remedial cycles. A layoff exposes the strength of a company’s management practices. If managers avoid coaching, the process will feel arbitrary. If managers have been clear, the decisions will still hurt, but they will make sense.

Remote teams often ask whether satellite offices or distributed workers are targeted first. Sometimes they are, not because remote is ineffective, but because coordination costs rise when teams shrink. Leaders may favor co located squads for a period to rebuild rhythm. If this choice is made, it should be stated plainly and given a time frame. People remember whether decisions were framed as a delivery strategy or as a disguised bias.

Looking back, many leaders would do a few things earlier. They would build the work map before a crisis forces it. They would speak the plan sooner so fear does not fill the silence. They would fight for a severance budget even if it requires cutting a project they love, because the way people leave teaches the remaining team whether to trust the company. They would carry one sentence into every hard meeting. We are making a smaller company to keep a real promise, not a softer one.

Layoffs will never feel clean. They mark a loss of colleagues and a change in identity. Yet they do not have to be chaotic or cruel. The path is steady and repeatable. Decide what you are building. Fund only the work that makes that promise real. Keep the people who make that work possible and durable. Tell the truth, quickly and with care. Then rebuild a company that deserves the commitment of those who remain. That is how companies decide who to layoff when the margin for error is thin, and that is how a hard cut becomes a restart rather than a slow decline.