Revenue is down, costs are increasing and your operating income is being squeezed. When you look at your Profit & Loss Statement, one of the largest line-items (maybe THE largest line-item) is labor. What do you do?
In the past, the conventional wisdom, especially in the United States, has always been to reduce the workforce. In fact, the U.S. economy has been widely praised for its flexible labor markets. U.S. companies are thought to have a competitive advantage over European and Japanese firms because they can reduce their workforce with relative ease.
However, in the past few months, as U.S. companies have come to terms with the fact that we are twelve months into a recession that might get worse before it gets better, some corporations have come to a different conclusion. A recent Wall Street Journal article highlights the approach of reducing salaries across the board versus lay-offs.
It could help avoid the disruptive and expensive process of firing lots of workers in a trough — and the added cost of rehiring them when the recovery occurs. FedEx’s cuts for its better-paid employees also might give management credibility to ask for cuts elsewhere if the recession drags on.
The article also cites three macro-economic benefits to this policy; (1) Aggregate demand remains stronger when all employees have a job, (2) banks benefit because fewer consumers default on mortgages and credit cards and perhaps the most important (3) the price of labor re-adjusts, just like the price of raw materials and other supplies that come down during a recession. And this last point helps prepare an organization for the inevitable recovery.
Now, if you do elect to take this route, you’ll need to take extra steps to ensure that employees remain engaged.