Elon Musk Is Doing His Best Jack Welch Impression

Word leaked on Friday that Tesla (NASDAQ: TSLA) had fired 400 to 700 workers across the organization as part of its "annual performance review." That's a nice way of saying Tesla annually cleans house and dumps what it views as the weakest-performing workers, eventually replacing them with new staff.

The practice isn't unheard of. In the 1980s, Jack Welch at General Electric (NYSE: GE) made firing what he viewed as the bottom 10% of the workforce a part of the business every year. It was known as the "vitality curve" in GE, and it was a staple at the company for three decades. I's now been abandoned, and even annual reviews are in the rearview mirror. But Elon Musk thinks firing people every year is still a pillar to building an efficient business.

Musk's vitality curve

The idea of firing the lowest-performing employees makes sense on the surface. You want to keep high-performing people and reward them, and low performers may slow the rest of the group down.

Reality is far more complicated. These are people who are being fired, and they have relationships, both inside and outside of Tesla, with people who will be staying on. Particularly on an assembly line, workers still in the trenches know the people who are gone. If Musk is asking workers to go through "production hell" to get the Model 3 launched, he needs happy, productive workers -- and firing a certain number of people every year may not achieve that goal. Here are just a few negative side effects Musk needs to consider with his workforce.

• Morale: If Tesla is going to ask people to work extra hard to get the Model 3 production line up and running, it needs to have high morale in its workforce. Firing workers goes directly against that. I've been in an organization that laid off workers, and it's corrosive to morale and motivation, leaving every person to think twice about their own self-interest within an organization rather than the team goal. 
• Learning curve: Tesla is in the midst of an expansion at breakneck speed. It still says production of 500,000 vehicles next year is within reach, so it needs all workers to be up to speed on what to do. Firing employees and replacing them with new ones will invariably slow down that process. There's a learning curve at any company, particularly at the skilled labor positions. Tesla can't expect workers to hit the ground running, and may set itself back by firing an experienced part of the production crew. 
• Recruiting: Tesla has long been a company with a long line of applicants willing to come work for it, but reports of poor working conditions and long hours have eaten into the company's reputation as an employer. Now workers have to consider whether Tesla is worth working for at all, because it doesn't seem to have much job security. If workers value family life, flexibility, and stability more than working 24/7 to "change the world," they may not want to work at Tesla. For better or worse, Elon Musk seems to have built a culture that only wants people who put Tesla #1 on their priority list, and there doesn't seem to be a lot of loyalty to the workers who are loyal to Musk's cause. 
• Culture: The culture of an organization starts at the top, and Musk is building a culture that's made for workaholics who are highly competitive. That's worked for the company so far, but it may have repercussions as Tesla grows in size. Employees may see undercutting each other as a way to reach the top of the organization, and may put pleasing Musk ahead of the safety of customers (see the Autopilot rollout). Silicon Valley learned from Uber that a corrosive culture can be toxic, and I worry that Tesla's culture is already becoming its own kind of (non-Uber) toxic. 

Tesla needs to remain a place people want to work

Right now, Tesla won't see much impact from the 2017 round of firings. There are still plenty of people around Silicon Valley and Nevada who want to work on making batteries and the Model 3. But if Tesla builds a reputation as a company that's not good to work for it'll have a harder time recruiting the great workers Musk wants on his team. And Tesla may actually find that workers want some job stability, meaning they may turn to unions to protect their jobs from the whims of Elon Musk. That's not something anyone at Tesla wants to happen today.

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Travis Hoium owns shares of General Electric. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.