December 21, 2009

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.

Related Topics

• Money

Related keywords

Julie Rains, Article, financial management, Wise Bread

Join the conversation ( 4 )

• Linsey Knerl 2 years 3 months and 28 days ago

  

  Love the idea of cutting hours rather than wages. I think most employees with families will welcome the time to work on home projects, spend time with kids, or start a freelance business. As long as benefits stay in tact, this is optimal for everyone (especially those employees who generally work a large amount of overtime.)

• Nora Dunn 2 years 4 months and 9 days ago

  

  I believe in this day and age that communication with employees is imperative. Gone are the days of loyalty: on the part of the employee as well as the employer...sometimes loyalty is a luxury our economy and work environment can't afford. By instead communicating with employees about the tough times of the company, everybody can band together to get through it - with the cutting of hours for example - and come out the other side even stronger for it. Thanks for the great analysis!

• Julie Rains 2 years 4 months and 18 days ago

  

  Excellent point about benefits. It would be counterproductive to cut hours and have employees lose their benefits; but to my knowledge, this wasn't the case though benefits would take up a greater proportion of earnings. Another point that I didn't mention earlier is to consider how wages line up in the industry; in this scenario, they were more at the mid-to-lower range so cutting rates may have had a greater impact on employee attraction/retention than other companies paying above or well above average wages.

• Thursday Bram 2 years 4 months and 20 days ago

  

  I think, in general, that the idea of cutting hours make sense. I think the biggest concern, from the employees' point of view, would be how the fewer hours might affect benefits packages. If the operations manager you talked to worked for a company that offered benefits packages to full-time employees, but not part-time employees, for instance, cutting hours could effectively work out to cutting salaries when benefits were recalculated.