How to cut your wage bill (before you cut your headcount)
Employers are looking at their wage bill in horror as demand falls and their businesses are stagnating - but they are reluctant to cut staff straight away.
Many are exploring other options. In a recent survey by KPMG of 152 mid-size firms, with turnover between $10 million and $200 million, 81% intended to keep salaries flat for the next six months. More than half have asked their employees to take leave and 38% are offering reduced work hours.
But there are risks with these strategies. In some workplaces, you could do more harm than good, and a one-time-only deep swift cut of jobs now could be a better way to set yourself up to survive the recession and prosper in the recovery.
SmartCompany went to the HR experts and employment lawyers to find out the pros and cons of the most common strategies for cutting wages without cutting headcount, and the legalities they entail.
Forcing people to take holidays
When employees accrue leave, the value of it accrues as a liability on your balance sheet statement - if the employee left the company tomorrow you would have to pay it out. When staff take their accrued leave your liabilities fall and your profit goes up.
Assuming you don't have to pay anybody else to replace the people when on leave, forcing a staff member to take leave costs you nothing in cash. In most workplaces, the other staff will pick up the slack.
But David Reynolds, executive general manager of HR firm Chandler McLeod, says one of the dangers of asking your people to take annual leave is that they will all do it at the same time, and your customer service suffers.
"People tend to take Mondays or Fridays to have a long weekend, so you may not have the staff there when you need them. It needs to be managed carefully," he says.
- Employees must agree to taking annual leave unless they have accrued an excessive amount.
- Sarah Rey, partner at boutique employment law firm Justitia, says under the Workplace Relations Act an employee who has accumulated more than eight weeks leave can be required to take up to 25% of the excess leave. So, for instance, an employee with 12 weeks accrued leave can be forced to take a week off.
- Individual contracts and workplace agreements may have other more generous provisions in favour of the employee, which must be complied with.
- Under legislation in most states, employers have an option to give notice to employees requiring them to take accrued long service leave. For example in Victoria, employers have a right to direct employees to take accrued long service leave under the Long Service Leave Act, provided they give at least three months notice.
Asking staff to take unpaid leave
PricewaterhouseCoopers chief executive Mark Johnson has asked more than 5000 staff to take between 10 and 15 days of unpaid leave before the end of January next year. Johnson said the measure, which follows 170 job cuts earlier this year, would produce "a significant saving".
The firm's goal is to temporarily reduce costs without losing staff permanently. "It's a responsible way to deal with cost reduction and keeps our workforce intact to deal with a pick up ... we have a very skilled workforce and our ambition in to keep them for the upturn," he says.
It is important that your clients don't suffer because you don't have enough staff on deck to service them. In the case of PricewaterhouseCoopers, not all staff have been asked to take leave. The firm's partners and the staff working on insolvency and corporate restructuring do not have the option.
- You can't force staff to take the unpaid leave, you must have their consent.
Introducing four day (or three day) weeks or switching full-timers to part time
Chandler McLeod's Reynolds says introducing a four-day week is being commonly used by companies at the moment after a round of redundancies when only key people are left and further costs need to be cut. But it can be used to avoid job cuts too.
The obvious advantages to reducing employees' hours, whether temporarily or permanently, are that it offers employers an immediate 20% saving in wage costs, avoids redundancy payments and allows the company to retain its people and intellectual property.