When workflow is slow or indeed non-existent, your employees and associated costs quickly raise to the top of mind. While layoffs can seem an immediate solution, and standing down employees might be unavoidable, there are choices for many organisations, starting with labour cost management strategies.
Managing your labour costs should focus on maintaining – as much as is feasible – your ‘people infrastructure’. Keeping your workforce intact while we bridge the gap between periods of economic activity can help to ensure a faster reboot for your business. The employees you keep are the ones who will capture future opportunities and drive economic resilience as the market recovers.
There will be an end to the Coronavirus pandemic and imagine a world in a few months where demand is soaring, but you don’t have a workforce to meet your customers’ needs. Worse yet, if mass layoffs occur in the wider economy, it will prevent the country from bouncing back as quickly as it has the potential to. Like each of us plays a role in effective social distancing to combat the pandemic, every business can play a role in ensuring there is enough available economic potential to return to previous levels of activity.
These six strategies will help you weather the economic storm so that you can keep your people infrastructure intact to meet future demand and bounce back:
1. Keep the employees you have
While reduced headcount can save on expenses in the short-term, how much will it cost you to replace the people you lose? The cost to fill a vacant position varies by role and talent scarcity, but there is always a cost. Reducing headcount might look better on the short-term incomes statement, but it just might cost you more in the long run to rebuild a team.
Recognising the immense risks to public welfare and the likely inability for businesses to bounce back after such a large shock to the economy, governments across the world are taking action by providing direct assistance, including wage subsidies to keep people connected to their employer. Government assistance schemes should be fully explored in any labour cost management strategy.
Perhaps the most important reason to keep your employees on the books however, is loyalty. Loyalty works in a virtuous circle. The loyalty and commitment you demonstrate now will generate trust and loyalty dividends from employees in the future. Conversely, short-term reactions that negatively impact employees can have long-lasting impacts on employer brand perception.
2. Start at the top
When looking to manage labour costs, a good rule of thumb is to start with the most highly paid executives and board directors.
Starting at the top is crucial. Not only is it important for leadership to role model ‘community first’ behaviour and demonstrate that they are truly part of the team, lower level employees tend to be more in need of their salary and even a small decrease in pay could be much more difficult to manage.
During the GFC, some organisations stopped paying executives in cash and paid their executives in shares, though we should note in cases including AIG, it was an involuntary initiative. This time around, a number of organisations have already executed the ‘starting at the top’ strategy:
3. Redeploy resources
It’s time to think laterally and creatively; how else can your employees work?
Just as retail stores are having to ramp up their online facilities with staff who usually work in physical stores, you might have excess employee capacity in one part of your business, but increased demand in others. Some airlines are moving lounge staff, who are well versed in rebooking passengers, to contact centres which are fielding unprecedented levels of calls. Internal redeployment is often a win-win for the employer and employees as jobs are saved, redundancy costs are minimised and teams broaden their skillsets.
Some organisations fare better than others in economic downturns, and redeployment of employees through partnerships outside your organisation can be a winning strategy. For example, CottonOn closed its stores on the 29th of March but is working with Coles and Aldi amongst other employers to redeploy their staff. Similarly, Qantas has been working with its partner, Woolworths, to find employment for ‘stood down’ employees.
4. Reduction in salaries / work rosters
a. Collective reduction in salaries or work rosters – ‘We are all in this together’
"The selflessness of workers who would rather cut their hours than see a friend lose their job."
President Barack Obama in his 2009 inaugural address*
Sometimes it takes the sacrifice of some individuals to keep an organisation afloat. A ‘voluntary’ 70% pay cut for anyone would have been unimaginable just a month ago, but if social distancing restrictions prevent them from playing anymore games this year, that’s exactly what The Australian Football League players are facing for the 2020 season. In a sphere built on competition, the players are co-operating to safeguard the future viability of the game – ensuring they can all come back for the 2021 season.
Collective salary reduction is also happening in the Australian Hotel Union to share the available work amongst more employees. Under the recent initiatives, a full-time employee's minimum ordinary hours will drop to 22.8 hours a week while a part-time employee could work an average of 60 per cent of their guaranteed hours per week. Other unions are in talks to take similar measures in orders to protect jobs.
Collective salary reduction works. During the GFC, Brandeis University in America proposed that the school’s 300 professors and instructors give up 1% of their pay. The individually miniscule amount collectively saved several jobs.
b. Involuntary reduction in salaries or work rosters
Unilaterally reducing fixed salaries or typical work schedules of employees was a strategy that FedEx, Hewlett-Packard, Advanced Micro Devices and The New York Times all successfully used in the GFC to help keep their businesses afloat. While involuntary reduction has the potential to damage morale, especially to the highest performing employees who are likely to have other options, it is a definitive demonstration of a company’s commitment to keeping jobs.
To make this strategy work, we recommend:
5. Leave - Voluntary leave (in some cases with partial pay or benefits)
While ‘purchasing leave’ has becoming a trend in recent years due to its cost benefits for businesses and flexibility for employees, this policy can be useful in economic downturns.
If you offer leave without pay to employees and there is enough uptake, you can potentially reduce the need for further employment actions. American Airlines is currently using this strategy to minimise the economic impact on staff. The organisation is offering employees voluntary leave packages that allow them to keep medical and dental benefits, and in some cases a percentage of their salary. In Australia, Virgin Australia employees have been asked to use accrued leave, with or without pay.
Reducing your business’ liabilities is a priority in a downturn and any accrued leave is a liability, so if you don’t need parts of your workforce, now is the time to ask then to take voluntary paid leave.
Leave can continue to be an effective strategy when social distancing measures are no longer in place. There will be a ramp-up period before you operate at full capacity and some employees will want to take the opportunity to take the trips that were cancelled due to travel restrictions.
6. Closely managing non-fixed labour costs
“People feel they’d much rather have a job in six months than get a bonus right now,” said Jon Littell, a web designer during the GFC.
Salary freezes, halting or reducing bonuses, bans on overtime and effective rostering of shifts are some of the other tools you have at your disposal. Though many of these options will not be popular with employees, given the uncertain outlook, a conservative and prudent approach can help businesses keep their workforces intact well into the future.
Looking forward, you have options and choices. Keeping your workforce together is key, even in the face of significant economic headwinds. Reducing your headcount should only be the option when you have exhausted all other options. The strategies outlined here can be used in combination to effectively manage your labour costs right now and in the coming months.
Enduring reputations can be made or lost in tough times. Your staff, prospective talent and the market will remember what you do. The businesses that take heed of historic lessons and do their best to fulfil their wider ‘duty of care’ are setting themselves up for the coming rebound.
Principal, Mercer Consulting
Michael Moses is a Principal in Mercer’s Career business based in Sydney. Having previously worked in Mercer’s offices in Dubai, New York City and Chicago, Michael is a tenured human resources consultant with experience in delivering projects across the world.
Michael has worked with publicly-owned, privately-owned, government, semi-government and tax-exempt organisations to develop human capital systems that help attract, retain and motivate employees in a way that is consistent with the organisation’s mission, vision, values and strategy.
Michael’s specialisations include the design, analysis and implementation of global remuneration and career systems including job levelling frameworks, annual and long-term incentive schemes as well as remuneration management policies.
Michael is a regular speaker at major industry conferences, the author of Mercer’s Post Hayne Playbook and his views on remuneration and culture have been featured in the Australian Financial Review and Investment Magazine.
Michael is an MBA Candidate at Melbourne Business School (Australia) and has a Bachelors Degree in Economics and Applied Statistics from the University of Michigan (USA).
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