Reducing People Costs in a Downturn

Businesses are living through unprecedented global changes in many countries. Every employer could be affected by current economic shifts, and face having to adapt to a new environment. The Russian market is no different. Having seen a decade of rapid growth, where employees were in demand and often able to name their price, there is now a shift away from certainty and comfort in the employment deal between employer and employee. Nobody knows when, or if, these elements will be restored.

This will mean organizations need to change the way people are employed. The drive to cut costs often starts with human resources (HR) and people management, whether through reductions in headcount, lower learning and development spending, or even targeting the HR function itself. How should the HR function react to these pressures?

When people cost reductions are required, it is common to assume that this means job losses. But there are other measures that can be considered first, such as reallocating people from quieter teams to busier ones, reduced working hours and flexible working, sabbaticals for travel or study, and offering additional unpaid vacations. While employees are usually the single largest cost for most employers, it is important to remember they are also the greatest asset. Companies should think very hard before applying a standard percentage headcount cut across all departments. By using this indiscriminate approach they could be losing some of their leaders of tomorrow. If a company wants successfully to weather the downturn and grow beyond it, the identification and retention of talented employees is essential, not merely a nice-to-have. Wise managers will take this longer-term strategic approach when selecting candidates for any headcount reduction.

Another area of focus is remuneration. Pay provides obvious opportunities to make savings, but a cut or freeze in base pay is not something that employees in high-inflation Russia are likely to take kindly to. Instead, employers could review the make-up of the total compensation packages they pay. This could yield some possible efficiencies, for example:

Is the pay and grading system right? Many companies do not have a robust grading system, so some job holders may be being paid more than the responsibilities and skills required of that position warrant.

Could the balance between fixed and variable pay (base pay and bonus) be changed? In the current economic climate, companies may wish to make a greater proportion of pay dependent on the financial performance of the company.

Does the company use long-term incentives for senior management? The best practice is for bosses to participate in arrangements linked to company share price, so their interests are aligned with those of shareholders. Executives may be disillusioned with share-based pay given the decline in the stock markets, but now could be just the time to make new awards, taking advantage of future share price increases. And it may be cheaper for the employer than a cash pay rise.

Lastly, the HR function is unlikely to be immune to the requirement to make cuts. The HR team is the custodian of many processes: recruitment, performance management, payroll, learning and development, compensation and benefits and others. There is likely to be scope for efficiencies here. HR functions could consider benchmarking their processes against those of other organizations, or even other departments within the company. For example, costs and revenue per employee could be measured in order to assess the contribution of human capital investment to financial performance. By applying hard metrics to its processes, the HR function will be able to identify savings opportunities. In addition, it could prove its worth to the business as a whole, rather than simply being viewed as an overhead.