In the midst of the economic downturn earlier this year, I spoke with an operations manager who had received a mandate from his boss to trim payroll costs. He considered reducing hourly wages (or pay rates), as many companies were doing, but then had a better idea: cut hours.
Fewer hours lowered payroll expenses in the short term and positioned the operation to support sales growth (and fluctuations) in the long term. Because the labor hours needed to run his operation correlated with sales volumes, he could readily make adjustments to payroll dollars without sacrificing service quality. Well-established procedures created internal efficiencies but, just as significantly, supported predictability in the amount of time needed by employees to handle certain tasks; as a result, the manager could more readily plan and control payroll hours needed to support the company’s sales volumes.
Here are the 4 reasons he decided to cut hours, rather than wages.
1. Employee pay became more closely aligned with business success. An increase in sales typically meant corresponding increases in labor hours and paychecks. Employees had an incentive to perform well in order to build and reinforce positive customer relationships, generate good feedback, and encourage repeat orders.
2. Employee morale and loyalty were preserved. Many employees had dedicated years of service and sustained effort to qualify for merit raises; a pay cut would erase the hard-earned pay rates. If wages had been cut, the manager imagined that his employees would wonder, “When business gets back to normal, will I start earning my regular pay?” or “If the boss gets used to paying me less, will he ever decide to start paying me more?”
Under the wage-reduction scenario, there were no clearly defined time frames or performance hurdles for returning to previous hourly rates. With the lower-hours plan, when sales picked up, hours would automatically increase.
3. A reduction in labor hours rather than a pay-rate cut gave employees more time for outside pursuits. As a result, employees could possibly sustain their respective financial conditions, despite a smaller paycheck.
In the off hours, employees could:
- Generate income from a side business, freelance projects, or part-time work
- Search more aggressively for bargains
- Reduce the need for outside services associated with maintaining a household in favor of personally handling these tasks, eliminating certain expenses
4. Employees were more motivated to stay with the company, rather than search for a new position. Because the pay rate held steady, it was less likely (though still possible) that employees would find a higher-paying job. Cutting hours rather than wages helped to prevent a talent drain while waiting for the recovery.
To reduce payroll expenses and maintain a well-run operation:
- Communicate with employees about the rationale for reducing work hours rather than cutting hourly wages
- Monitor operations to detect if service and efficiency falter (having performance measurements and standards in place prior to implementing payroll changes is useful)
- Set direction regarding labor hours at the outset, then tweak staffing decisions at regular intervals based on sales results or other drivers of operational volumes
The decision to cut hours worked for this manager. Employees were glad to keep their jobs in the darkest days of economic turmoil. What’s ahead is still uncertain but the operation has preserved its financial stability and retained its best, experienced workers.