No-Layoff / Probation-First Workforce Policy
Don't fire your way through a downturn — probation, not termination.
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 80%
Morris Chang's approach to workforce management rejects the common 'knee-jerk' reaction of laying off employees based on performance ratings during a downturn. His reasoning: performance ratings are inherently subjective (each supervisor grades their own people), so using them to select hundreds of layoffs destroys trust; and if the business is likely to need those people back within a year, the combined cost of severance (about six months' pay) and retraining a replacement (about six months) makes layoffs a false economy. Instead, Chang's TSMC used up to six-month probation, with underperformers most often returned to their jobs or transferred to a better-fit role rather than terminated. When a prior CEO circumvented this by relabeling a layoff as 'performance management' and cutting 600-700 people, it triggered employee protests and led Chang to reverse course and retake the CEO role.
Origin
Chang first pushed back on ratings-based layoffs as a TI executive in the early 1970s, arguing they weren't credible; he carried the same principle into TSMC's leadership decades later.
Core principles
- 01Subjective performance ratings are a poor and unrespected basis for layoff decisions
- 02If you'll need the people back within a year, the layoff math doesn't work (severance plus retraining costs roughly equal the time saved)
- 03Probation preserves institutional trust better than termination
- 04Major workforce decisions should go through the board, not be relabeled to avoid oversight
How to run it
- 1
Resist the reflexive downturn layoff
Recognize the 'kneejerk' instinct to cut costs via layoffs during a crisis and pause before acting.
- 2
Run the retention math
Compare the cost of severance (~6 months' pay) plus rehiring/retraining (~6 months) against how soon you expect to need the headcount back.
- 3
Use probation instead of termination for underperformers
Place low performers on a defined probation period (e.g., 6 months) rather than firing them outright.
- 4
Reassign rather than release
Where someone isn't succeeding in their current role, look for a transfer to a better-fit position before considering separation.
- 5
Require board approval for real layoffs
Route any genuine layoff decision through a formal board vote rather than allowing it to be executed unilaterally under another label.
Watch out Relabeling layoffs as 'performance-based terminations' to bypass governance breaks trust with both the board and employees.
In the wild
TSMC's CEO laid off 600-700 employees during the 2008 financial crisis by labeling it performance-based terminations rather than a layoff, avoiding a board vote Chang would likely have blocked. Protests formed outside Chang's home for months.
→ Chang retook the CEO role, offered to rehire affected employees, and restored the company's long-standing no-layoff norm.
Common mistakes
Using subjective ratings to select layoffs
Performance ratings come from individual supervisors and are inherently subjective; using them to choose hundreds of layoffs is not something employees will respect.
Circumventing board oversight
The prior CEO avoided seeking board permission for a real layoff by calling it a performance action instead, undermining governance and trust.
Is it for you?
Best for
Leaders managing cyclical industries where skilled headcount is expensive to rebuild and trust with the workforce is a durable asset.
Not ideal for
Structurally overstaffed organizations that genuinely need permanent headcount reduction.
From the transcript
“we the worst we would do was to put them on place them on probation for 6 months and quite often you know at the…”
“the performance ratings are done by everyone's own supervisor so 700 worst performing people in the company and who gave the 700 people the bad…”
From the episode
TSMC Founder Morris Chang
Morris Chang