Need to Cut Labor Costs but Avoid Layoffs? A Checklist of Cost-cutting Options (Part 2 of 2)

Last week in Part 1 of this series, I mentioned that as the global economy continues to emerge, many organizations may find themselves needing to cut labor costs on a recurrent basis. During times of economic decline, the need may be for drastic cuts, which the options presented last week can address, but it is entirely possible that smaller or moderate cuts will be needed even in times of growth.

The following options address those circumstances and are grouped into options for moderate cost reduction and small cost reduction.

Moderate Cost-Reduction Options

Reducing hours: this is another “pay reduction” approach where you reduce the hours of work for selected non-exempt workers. The percentage of hours reduced might vary by individual; it’s similar to short-term furloughs, but hours are reduced as opposed to whole days.
Effectiveness — medium if focused on poor performers and low-impact jobs.
Benefits — workers might view it as OK because it’s a stopgap to avoid layoffs.
Potential problems — hourly employees often live on the edge, so this might result in higher turnover. Employees “fighting” over available hours may cause work disruption. Top performers who have choices may go elsewhere unless the need to reduce costs is an industry-wide phenomenon.

Cut benefits: reducing corporate contributions to pensions/401k or increasing employee-paid health care costs. Sick leave or vacation can also be cut.
Effectiveness — medium
Benefits — most employees don’t notice the reduction in the short-term. The key is to identify high-cost benefits that few use and most wouldn’t miss.
Potential problems — if it gets media coverage, it can hurt your brand image. It disproportionately hurts families and older employees. If you cut sick leave, it may cause sick employees to come to work and spread diseases.

Hiring freezes: where you eliminate the hiring of new employees into vacant jobs.
Effectiveness — medium with many negative consequences
Benefits — if you have lots of open positions, this can result in significant salary and benefits savings. Less business impact if only surplus positions go unfilled.
Potential problems — it will lead to major income reduction if revenue generating jobs are not filled quickly. Major workforce disruptions can occur if the vacancies are in key and non-“surplus” positions. Top talent opportunities may be missed and managers may keep poor performers who they were considering releasing because they are better than having no one. Many freezes are really sieves where the hiring freeze is frequently circumvented. Some managers hire the same candidates under contract, resulting in no net cost savings.

Pay cuts: where you cut employee or executive salaries by a certain percentage but you do not reduce the days that they work.
Effectiveness — medium if you focus on managers and executives
Benefits — managers and executives will usually tolerate these cuts because they are more highly paid.
Potential problems — it may lead to major workforce disruptions, especially if layoffs occur anyway. It may drive top performers the way because everyone was treated equally. It may not be possible under union contracts. Most will have an expectation that at some point these cuts will be restored. In tight economic times, any reduction in income may cause families living on the edge to lose their house, and so on.

Small Cost-Reduction Options

Forced vacation: where employees are forced to take accrued vacation in the short-term to convert to balance sheet costs.
Effectiveness — medium
Benefits — because of accounting rules, it reduces corporate liabilities.
Potential problems — The dollar impact may be low if employees don’t accrue large amounts of vacation. Can result in work disruption when many employees take vacation simultaneously. May disrupt families by forcing vacations during unusual time periods.

Pay freeze: under this approach, salary increases are eliminated.
Effectiveness — low with negative top-performer impacts
Benefits — since not all individuals expect a pay increase each year, it might have less effect on employee morale.
Potential problems — the amount of labor cost reduction might be small. Top performers (those most likely to get a pay raise) may become frustrated and look elsewhere because they feel they’ve earned a pay increase.

Promotion freeze: where all promotions are frozen.
Effectiveness — low with significant negative top-performer impacts.
Benefits — in companies with few promotions, cost reduction will be minimal.
Potential problems — it will frustrate and likely cause turnover among top performers.

Other Cost Reductions

Many firms use a misguided “save people first” approach to cost cutting, so they attempt to reduce travel, subscriptions, conferences, equipment, telephone costs, etc., before they try any of the above approaches. That may seem like a good idea, but reducing the salesperson’s minutes on a mobile phone might reduce sales more than the initial cost-savings.

In addition, a carpenter can’t really do his job without a sharp saw, nor can a programmer without her latest software tools.

The key is to use reduction approaches where the impact on productivity and innovation is considered and measured along with initial cost reduction.

Final Thoughts

As you can see from this checklist, the highest-impact approaches with the least-negative impacts on top performers are reducing contingent workers, surgical layoffs focused on poor performers, expanded use of productivity improvement tools, better use of technology, and the long-term outsourcing of work where the level of work fluctuates significantly.

On the other end of the spectrum, voluntary buyouts and furloughs to reduce salary costs have the most negatives associated with them.

The most important thing to remember is that you should set specific measurable goals before each action relative to both the short and long term, then check to see if those goals were actually met. In many cases, you’ll be surprised to find that some of the approaches have so many negative unintended consequences that you will not have decreased cost due to negative impacts on productivity and top-performer turnover.

About the Author

Screen Shot 2015-05-19 at 9.41.40 AM
Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations. He’s a prolific author with over 900 articles and 10 books covering all areas of Talent Management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations / organizations in 30 countries on all 6 continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR and the Financial Times. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring”, Staffing.org called him “the father of HR metrics” and SHRM called him “One of the industries most respected strategists”. He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked #8 among the top 25 online influencers in Talent Management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on www.ERE.Net. He lives in Pacifica, California.