Guide to Payroll Cuts
Posted in Salaries & Benefits
With the state of today's market, companies are setting up emergency action plans because, says Ray Silverstein, companies' survival depends on it.
When a company earns below a certain point, the only solution is to cut outgoing cash flow - which of course includes the company's payroll. Making payroll cuts is hard, but it's necessary when during emergency situations.
When making payroll cuts, you have to consider three thingsa:
- Who and what to cut
- When to cut
- How to minimize damage
Who and what to cut
Making payroll cuts basically means laying personnel off. If you decide on giving some employees the pink slip, make sure to leave your emotions inside your office. Silverstein advises managers to plan ahead, rather than make payroll cuts when you're in panic.
When determining who gets the boot, base your decisions on employee capability. Don't let things like seniority or need muddle your decision.
Rank your employees according to their contributions. Create a list of employees starting from the most productive to the least. This will help you know where to start.
But laying personnel off is not the only way to stem outgoing cash flow.
Consider the following alternatives.
- A four-day work week. Shortening your work week by one day will automatically give you a 20 percent payroll deduction. Plus, unlike layoffs, it's not as hard and as painful to do. And it will affect all employees equally, which most employees favor.
- Reduce wages across the board. Again, most employees will view this decision with favor. To make salary deductions easier to digest, build in performance-based incentives. Give employees the chance to earn more if your company hits certain revenue targets.
- Turn full-timers into part-timers. This reduces wages, saves on fringe benefits and saves vacation time. According to businesstown.com, fringe benefits are only reduced if employees work less than enough hours, per state, not to be considered full-time employees. Of course you still have to honor vacation time earned from past full-time employment.
- Enact furloughs. Ask your employees, in rotation, to take unpaid leaves for certain number of weeks.
- Suspend bonuses. Suspending bonuses can create big cost savings. Just make sure to announce the suspension ahead of time.
When to cut
Once you determine the emergency actions you'll take, identify your threshold for setting that plan in motion. It's up to you to determine your company's threshold. Items you should consider include cash level, inventory level, aging of outstanding bids, number of bids and backlog in hours or dollars.
How to minimize damage
Whether you decide to layoff employees or opt for any of the alternatives, your employees will be traumatized. It's you're job to ease some of their tension. Silverstein says the best approach is to be positive and upbeat. However, he says, you must be truthful regarding the situation of your company and the challenges it is facing.
Be frank and honest to your employees when announcing cutbacks. Appeal to their sense of reason. Validate what they're feeling and remind them about the current economic situation. Of course, when you ask your employees to make financial sacrifices, you have to make them as well. They must see that ‘everybody' is affected, and that you "share their pain."
Lastly, in the days following the ‘emergency', Silverstein says you should practice what he calls "management by walking around." Ask your employees how they are; tell them how your company is holding up. "Build a sense of purpose and possibility," adds Silverstein. "Leading by example is the best way to lead your company out of difficult times."
Source: entrepreneur.com
