The First Round Of Compensation Cost Cutting

When facing a need to reduce operating costs, the first round of compensation cost cutting should concentrate on areas that impact broad groups of employees rather than target specific staff. They should not include involuntary separations or layoffs. There are many ways to cut costs before instituting layoffs. Layoffs are disruptive and require collecting information and analysis regarding employee skills and job performance that may not be available at the beginning of a business crisis. It’s likely additional cuts that will include alternative work arrangements and layoffs will follow the first round of cost cuts. These take time to implement

This chapter provides details on 10 cost-cutting measures that companies can employ. But first there are some success stories.

Companies That Have Successfully Employed Across-The-Board Cuts In Compensation Costs

Following are stories from two companies that cut costs to avoid as many layoffs as possible. A West Coast medical center received its cue from the top when it came to cost reductions. The CEO set the stage. If an employee earned $100,000, he or she could volunteer to defer for cash flow purposes 20 percent of each paycheck to go into a fund to be paid in the future. The director of administration said the strategy was close to her heart. Employees were told the company was in a slump and preparing for a long-term contract to end, so it asked for volunteers. It seemed worth it to many to keep their jobs. The employees didn’t lose anything; they only postponed being paid some cash. The strategy worked well except for employees who had grown accustomed to living on every cent of their paycheck. Having a lump sum coming to some employees in the future was very appealing.

Here’s an example of another company strategy to avoid layoffs. World Now is a provider of Internet technology and revenue solutions for media companies. Jennifer Edwards, director of human resources, said that her firm asked employees for cost-cutting ideas. Managment felt that engaging employees in the decision-making process would result in changes with greater buy-in across the board. Edwards noted that senior leadership went to the employees and said, “This is your company. You’re the owners and stockholders, and we want your input. We aren’t telling you what to do. We want you to tell us.” The company launched a project where each team of employees went offsite and did a brain blast. The teams worked to develop ideas either to generate more revenue or to reduce costs. Initial ideas were then handed off to those who could best research them. The suggestions were sent back to management in the form of 65 or 70 new ideas, details on how to implement them, and the potential revenue and savings. Everyone participated in this exercise, from the CEO down to the mailroom staffers.

The ideas were pared to 30 and then whittled down to the best 15, which were put in place immediately. For example, the company had been outsourcing projects such as printing collateral materials. Because the firm designs Web sites, staff reasoned, why not leverage the in-house creative team and manage the process internally? Additionally, they discovered that purchasing was conducted by many different people in different places. As a result of this exercise, purchasing was consolidated and relocated, and one employee known as a “ferocious negotiator” was assigned to handle the task, leveraging internal talent and saving substantial dollars. The company also eliminated daily catered lunches. Finally, saving were shaved from offsite team-building retreats. Rather than spend $30,000 on such meetings, the company found less expensive, creative ways to get everyone together. It was important for the company to maintain its culture, and it did so, but on a different, less expensive scale.

The theme at these companies and others was to get employees involved in cost cutting. Such strategies generate interest and motivation in a very positive way. Employees are likely to support the measures taken because they were involved in developing the ideas. However, in subsequent rounds of cost cutting that involve changing job assignments and involuntarily separations, employee involvement is not recommended. The reason is that it may place fellow employees in the inappropriate position of recommending one another for a pay reduction or terminated employment.