How do I handle this lay off dilemma as middle management?

Is this situation common?

Yes. This is very common and a standard part of managing layoffs.

How can I, as the middle level management, handle the situation ?

The company should have properly prepared for this. If they haven't, it's probably time to look elsewhere. They are unlikely to survive.

Standard things to do:

1. Play with open cards. Disclose the financial troubles to the employees and explain the plan to restore the company's financial heath and how the layoffs fit into this plan.
2. Explain how the company got into the situation in the first place and what actions are being taken to avoid repeats. And yes, that includes holding executives who screwed up accountable.
3. Offer retention incentives to the employees you want to keep. Make it more attractive to stay then to leave.
4. Plan for some attrition. The amount of attrition you are going to see depends a lot on how well you can execute points 1 to 3 above.

Look, single well managed layoff is not the end of the world. If it's well communicated, feels fair and if there is a credible recovery story people get over it pretty quickly. There is some aspect of "cutting the dead wood", which can actually be advantageous. However multiple chaotic layoffs would be a real problem.

Part of the problem is that workforces resist the employer optimising its own interests regardless of the interests of the workforce, and it sounds like you're trying to exercise your control over the grant of layoff packages in visible and direct opposition to the perceived interests of the workforce.

Workers perform well in the first place because they have stable jobs where performing well leads over the long term to increased pay, stability, or status.

By entering into financial trouble which might collapse the company, threatening the stability of their jobs, and threatening to lay off lower performers, your employer has already taken away the reason for high performance, the comparators which define the relative high performance, and much or all of the basis on which these high performers are retained.

What you're trying to do is keep the ongoing high performers on as if future high performance is already banked, and shed the low performers, yet the reality is that your high performers will be left in a company teetering on sudden collapse where they are also now merely average performers. Naturally, as high performers in greatest demand elsewhere, they will want to exit.

The best answer in these circumstances is to just accept voluntary departure.

If you can, then increase the attractiveness of retention for those deemed high performing, so that they no longer wish to voluntarily leave. But in many cases, the reality of near-collapse will mean you cannot afford to retain the high performers, and it will mean that their motivating reasons for high performance may be irrevocably damaged.

Trying to lock-in people who want to go because there is insufficient positive motivation to stay, will just generate resentment, and you might end up sacking those who weren't the best but would have stayed to the end performing adequately, whilst retaining those who are going to be ill-willed, demotivated, and ready to jump.

If there are people who are genuinely "essential", then it's likely to focus your mind on what can be done to retain them. At some point on the path to bankruptcy, a company will have identified essential staff that it nevertheless cannot afford to retain, so there isn't always a solution.

The strategy is not yours to decide, it is up to upper management. Your job is to pick the victims according to the rules set up from above.

The people working for you are not stupid. By picking strategically you make sure that ones that are not laid off now know that their days are counted. So they will not be working hard to progress, and they will try to look for new jobs, so your company will suffer.

I would have recommended to pick a percentage, say 12%, and lay off 12% everywhere. Including 12% of upper management. That shows people that the company tries to make sure they have a future, that they will stay, and when they know that, the employees are much more likely to support you. Especially if one or two in upper management go.

Of course that's something you can't decide.

Any company can get in financial trouble. Your company decided to handle that with the wrong strategy.

I will not repeat what other people already told. I will give you an example of the opposite strategy.

I worked for a customer company which got into financial trouble. Even though they had enough money, the was blocked in unpaid bills from their customers. What was their strategy?

1. Be open to EVERYONE about the situation.
2. Organize the layoff LOTTERY.
3. EVERYONE was involved in the lottery with EQUAL CHANCES to get fired.
4. They ran several rounds of lottery, EXACTLY AS PLANNED.

How do I know that? Simple. Middle managers and even higher-level managers walked out without walking in again. And I know that because I worked closely with some of those people - even though we were in different countries.

What did your company do?

1. Divide people in "the gods" and "the mortals".
2. Make the rule that "the gods" do not get fired.
3. "The gods" arbitrarily divided "the mortals" (the productive people) in groups of "essential", more-productive and less-productive.
4. The rest is not even important anymore, because the steps until now already sent the clearest ugliest message to the employees - productive employees do not matter.

The only way you can recover is to use the money which you do not have in order to motivate the people who do not want to stay. Your company is now trapped exactly in its own trap.

Now you can decide:

• be a nice manager to the people under you - just tell them the truth, do the best you can for them - probably not much
• or save your skin, and play whatever music is played by your managers.

Either way, if the company does not recover, you lost. And if the company does recover, the people will still remember that they were not in the same boat with the "gods", they were left to be "mortals". And you still lost.

Good luck motivating them after this point. Sorry for your situation (your and everyone else's).

One more background, I would like know how North American company and European Company deal with that as I know and see a lot of Chinese companies deal with that. That is one of reasons I am asking here.

A lot of companies on most continents chose the same strategy as your company. Some of those companies recovered, some did not. But even if they recovered, it was not because the strategy was good, but because of the game of chances. Just remember that Toyota, after WWII, decided to change the way of doing things, instead of giving up. And the results are easy to see. Several (many?) other companies decided to keep all the people, and improve the way of doing things. And more often than not, it worked - mainly because people felt appreciated and valued, and contributed back to the company to the maximum of their abilities.

Another strategy applied in some companies was to cut the salary of ALL employees (to some degree), instead of firing. It is probably too late for your company to do that now.

Is it common that the remaining employees just become low performers (on purpose) so they can be laid off next round?

I am not sure, I doubt that there are studies on topic. But now you high-performers are definitely searching for new jobs. And they will go, regardless of the performance showed to you - as soon as they will find something minimally suitable. After that, they will probably continue searching another job, according to their level of experience and knowledge.

Wild idea: your company might be able to do some good repair to the damage with an extreme solution:

1. Fire most middle managers and high level managers.
2. Cut the salaries of the higher level managers - to the level of the salary of the productive employees (or, at least, very close to that level).
3. Give up all non-essential departments. Keep mainly only HR (maybe cut what is not necessary there too), purchasing, sales, accounting. Also keep the building maintenance department (if you have one). Or externalize the job if it is cheaper. Say good-bye to any "efficiency" departments you might have, or whatever other fancy-named non-productive departments.

I am 99.99% sure this will not happen, but it is a push in the right direction.

The dilemma that your employees are facing is that they no longer have the major benefit of employment: stability.

Without stability, they are now closer to being contractors or freelancers, but without the perks of being such. They are stuck with the worst of both.

To keep your best employees, you have to make them feel that they are still in a better place at your company. Here are a few ideas in addition to those shared in the other answers:

1. Alleviate their feeling of instability. You can't do that completely, but you can show them how the company plans to recover from this situation. That it's "running to" a future, not "running from" a bad position. Share the vision and the plans for recovery and ensure they are compelling. Maybe phrase it as going back to the startup phase and rebuilding the company with a tight runway.

2. Compensate them fairly for being in this situation. You've paid their colleagues layoff packages; it's only fair that you pay the more productive ones similarly. Give them the same money now in return for a commitment to stay for a year or two.

3. Make them more than just freelancers. Give them profit shares in the company. This gives them an inherent incentive to help the company return to profitability.

4. Create a work culture that values learning and creativity. Give them some of their work time to learn. It helps them grow, which directly benefits your company. They may also come up with innovative ways that help reduce costs or improve productivity by more than marginal gains.