Round 1: Across-The-Board Cost Cuts

The information systems division manager estimates costs that can come out in Round 1. First the manager lists current compensation costs:

1. Headcount: 1000 full-time employees

2. Annual salary cost: $55 million

3. Annual Employment (Salary + Benefits) Cost: $77 million

4. Annual overtime: $2.75 million

5. Annual employment cost with overtime (salaries, benefits, overtime): $79.75 million

6. Average annual salary per employee: $55,000

7. Average annual benefits per employee: $22,000

8. Average annual compensation cost (salary + benefit) per employee: $77,000

9. Average tenure: 4 years

Next the manager considers cost-cutting steps that will avoid laying off people. The human resources division (after consulting with several professional HR associations on best practices) advises the division manager to weigh 10 actions commonly taken to lower costs short of a layoff. (These are described in detail in Chapter 7.)

Cost cutting requires planning. It can’t be implemented overnight. In certain cases some investigation and analysis are necessary to see if an option is feasible (e.g., early retirements and severance offers). Other steps involve policy at the corporate level and cannot be implemented unilaterally by a division (e.g., stock option grants in lieu of pay increases). In addition the steps require a certain amount of resources to be executed. The manager may contemplate the use of a high-level task force to deal with the issues and make final recommendations. The task force must be organized and chartered. It might take more time for such a process to work, but the decision will have more buy-in for the tough measures the manager is about to take. Finally, a large organization may demand consistency of action across major divisions and units to ensure internal equity. The efforts of multiple division heads may be coordinated and assisted by a corporate HR function.

The manager builds a spreadsheet (see Table 5-1) to estimate the costs he can cut in Round 1:

The manager concludes that he can remove $5.77 million in costs in Round 1. He also notes that implementing these steps will be critical in terms of getting that cost out at this point. Other essentials include:

1. He must be explicit about when the costs will come out. The spreedsheet covers the costs that will come out this year.

2. He must make sure not to violate any employment laws, regulations, or contracts in taking the costs out.

3. He must communicate well, explaining why the costs have to come out and the benefit in terms of saved jobs.

   Table 5-1: Round One Cost Savings

   Action	First Year Savings (Benefit)	Comment
   1. Five employees take voluntary severance	$332,100	Five employees @ $77,000 annual total compensation cost-severance cost?*
   2. Five employees take early retirement	$332,100	Five employees @ $77,000 annual total compensation option cost-severance cost?*
   3. Cut out overtime	$2,750,000	Overtime is $2,750.000
   4. Mandatory pay cut	$0	No pay cut at this time
   5. Perquisite reduction (k)	$550,000	1% of a $55,000,000 total annual salary cost
   6. Reduced 401k contribution	$550,000	1% of a $55,000,000 total annual salary cost
   7. Reduced annual salary increases	$550,000	1% of a $55,000,000 total annual salary cost
   8. Reduced annual bonuses	$550,000	1% of a $55,000,000 total annual salary cost
   9. Hiring freeze	$154,000	Two positions @ $77,000 annual total employment cost per employee per year
   	Grand total first year savings	$5,768,200

   *The savings for the first year will be impacted by severance cost. Each employee is offered a severance package equal to two weeks pay for each year with the company and accrued vacation. Average tenure is 4 years and average vacation time is 2 weeks. Average weekly salary is $1058. Thus, the package is $10,580 for each employee.

4. He must identify those costs that not only should come out now, but also would always stay out. Future year cost savings will be higher due to the one-time costs for voluntary severence.

5. He must establish the conditions under which the costs removed can be reinstated.