Is ExxonMobil Exercising its “Operating Leverage”?

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As discussed in our last ExxonMobil PIP article, ExxonMobil has positioned itself to potentially layoff employees through a “performance improvement plan” or PIP.  A PIP is essentially a severance offer to leave the company, although an ExxonMobil spokesperson stated that employees who receive a PIP have the opportunity to improve their performance and keep their jobs (Jones). In April, ExxonMobil vastly increased the number of employees they put in their “Needs Significant Improvement” (NSI) performance category, making these people eligible for a PIP offer. Prior to April just 3% of the ExxonMobil workforce was designated in the NSI category. That number has now been expanded to include 8% of salaried US workers. Despite these changes, Darren Woods, the CEO of ExxonMobil, has continued to say the company has no plans of laying people off. Last week, Business Insider broke a story claiming that ExxonMobil made the adjustment to its performance evaluation process in order to “cut more workers without using traditional layoffs,” (Jones).

This move appears to be in response to ExxonMobil’s significant reduction in revenue since the pandemic began. But could this be part of a larger economic trend? Is ExxonMobil exercising their “operating leverage”?  

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The term “operating leverage” describes the ability of a company to reduce operating costs by replacing workers with technology. Obviously, companies have been replacing employees with new technology long before Covid-19 took its toll on the American economy. If a company has the opportunity to save money by laying people off and replacing them with some new innovation then 9/10 times that is exactly what they will do. However, many experts believe that the economic impact of the Covid-19 crisis will push corporations further in that direction. According to CNBC, the stock market has held up largely due to the fact that Wall Street believes, “many corporations are going to fire a lot of people and replace them with technology that will make the companies more efficient and improve profits,” (Pisani).

“… oftentimes those cost cutting

measures result in a lot of people

being out of work”

In investment circles, if a company is described as “gaining operating leverage” this means they are moving in the right direction. Unfortunately for that company’s employees, “moving in the right direction” often means laying people off in large numbers. To give you a better understanding of how operating cost work, let’s take a look at this example:

If a company brings in $100 in revenue per quarter and they have an income of $10, their profit margin is 10%. Then the company decides to cut 25% of their labor force and replace the employees with new technology. The next quarter’s report shows that revenue increased to $120 and their operating profit goes to $15. The profit is a direct result of the layoff. The profit margin is now at 12.5% ($15/$120), as opposed to the previous 10%.

In the face of the pandemic corporations have had no choice but to become more streamlined and efficient.  That is good for the stockholders but bad for the employees.   Cutting costs has to be the main focus of this process, and oftentimes those cost cutting measures result in a lot of people being out of work. Labor is typically the largest expenses a corporation incurs. It is also a variable cost, meaning (generally) as production increases so does the cost of labor. Technology on the other hand, is closer to a fixed cost, meaning the cost stays relatively stagnant even if production increases. In a recession companies are forced to look at every available option to save money, and it appears that many of them are investing in technology as a means of replacing people and driving down costs.

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