Do you need to consider ways to reduce your wage and salary costs? What options might you want to consider?

Cashflow is king at the moment so many Boards, business owners and managers may be being prudent on any spend that is not considered core to operations, and potentially looking at cost reduction.

As business owners and managers you obviously have a responsibility for ensuring the ongoing sustainability of your business, hence you need to look at each line of your cost-base very closely. Salary and wage costs make up a significant proportion of ongoing operational costs for most businesses.

Where possible, downsizing and redundancy should be a last resort as for most businesses a key source of competitive advantage lies in their peoples’ knowledge, business intelligence, and customer relationships. These sources will likely be deeper than most business owners/managers estimate, which means that reduction of certain staff members may be worse for business in the short to medium term than most people realise.  In addition, if this is a short term measure then when business picks up you may need to hire staff again, and this is a costly exercise in itself.  Therefore, before you start preparing for any downsizing requirements, it may pay to take the time to considerother options for reducing expenditure. Some examples are:

  • Deferring large capital spend such as acquisition activity or large asset purchases
  • Stopping any spend or investment on any non-core activities
  • Stopping the provision of new equipment to employees such as laptops,
  • Discontinuing attendance at conferences, training courses, etc.
  • Reviewing or deferring training incentive payments
  • Stopping annual salary reviews or making them discretionary exception
  • Reviewing bonus and incentive-based schemes, including sales commissions
  • Freezing current vacancies and not replacing resigning employees.
  • Reviewing overtime use and policy
  • Reviewing the use of contractors and casuals and whether the work they are doing is core to your business and if so, whether your permanent employees can pick up this work instead. If the work is not core, can you consider stopping these contractor/casual contracts?
  • Looking at whether retraining is an option for redistributing some internal resources from low to high need areas

NB: Keep in mind that even though the above are viable options, how many you choose to implement and how you go about doing this may impact the goodwill of staff which can easily impact staff engagement, productivity and the ability to attract good staff in the future.

Also, before considering implementing any change to do with employment terms and conditions it is critical to review employment agreements and policy for specific requirements and to genuinely consult with staff on any proposed changes.

If necessary, there are options for achieving more significant staff expenditure savings but these are intrinsically linked to people’s terms and conditions of employment so will definitely require careful thought, consultation and management. Options include:

Other options you may want to consider and mutually discuss with your employees prior to any downsizing initiatives, include things like:

  • Negotiating with staff to take a temporary pay cut – you will likely need a review date on this
  • Negotiating with staff to take a temporary reduction in hours of work – also likely to require a review date
  • Reaching agreement about the use of annual leave or scheduling this with 14 days’ notice if agreement cannot be reached. Note that while this does not reduce cash flow, it does reduce liability
  • With mutual agreement, your staff can agree to take a period of leave without pay.

Once you have considered your options, if you still need to reduce salary / wage costs, you could consider downsizing.

When it becomes apparent that downsizing in a business might be required, there are a number of considerations you must reflect on at the outset.  You will need to have a good handle on core drivers for your business and where you must invest to keep your business afloat. You will no doubt be getting advice from your accountant or business advisors, so you will hopefully know what these core areas are. If not, this is a piece of work you will need to complete before any restructuring process begins. 

As already mentioned, consultation is a critical element; it is essential that you do not make up your mind until you have sought and considered the opinions of impacted staff. 

Note that no matter how good your process is, such drastic change will have adverse consequences.  Before commencing, consider how you will mitigate damage to your external brand, staff trust and engagement (including those who remain), staff wellbeing and dignity, and the availability of skills you will need for core business operations post COVID.  

When you commence a restructuring / downsizing process, as an employer your obligations to permanent and fixed term employees are to:

  • Act in good faith
  • Remain open and transparent
  • Consult

 

There is a great deal of technical, procedural support out there at the moment for employers / business owners needing to conduct a restructure so use this support!  The risk of getting this process wrong is significant and the same for a business with either 5 or 5000 employees so it is important that any business takes the time to get this right.

Resources

Guthrie, J.P. & Datta, D.K. (2007).  Dumb and Dumber: The impact of downsizing on firm performance as moderated industry conditions. Organization Science, 19 (1). Retrieved from