It’s never easy to do a layoff. If you have to do it, Professor Bob Sutton from Stanford business schools gives good advice via Wired (oddly not on their website, but in their print edition). I’ve repeated the advice below with my annotations italicized.
Predictability: (If it is clear that cuts will happen) Warn your staff exactly when cuts will happen. Secrecy breeds stress.
Understanding: Humans always want to know why. Give reasonable justification for termination. (Note that with layoffs personal performance is not a factor – layoffs are to do with positions being eliminated. Explain why the company cannot afford to keep the position.)
Empowerment: Let them have some control over their exit. A package with options – say, a choice between extended health coverage or cash up front – reduces anxiety.
Compassion: A little humanity goes a long way. This can include things like having surviving staff out of the office so that affected employees can pack up their desks without people watching them.