Great ways to lower your wage costs
When companies run into trouble they are often quick to lay off people to reduce the wages bill. But, as Michael Fingland explains to Phil Dobbie, this can be highly counterproductive – it upsets the company culture and you lose expertise that can be costly to recruit when the situation improves. This podcast covers over ways of reducing your wage costs, based on the outcomes of a brainstorming session from the Vantage Performance team.
Phil: Hello, I’m Phil Dobbie. And today on the “Vantage Performance Podcast,” are there ways you can cut your wage costs without cutting your labour force, or without getting your staff upset about pay cuts? It does sound like an impossible outcome, doesn’t it? You’re gonna have one or the other. Surely, you can have less people, or you can pay those people you have less money. Otherwise, how can you cut your wages bill? Well, keep listening because Michael Fingland, the Executive Director and CEO of Vantage Performance, has been brainstorming ideas on just this with his team. But Michael, first of all, the easiest and most common way, obviously, when times are tough is just to cut the numbers in your workforce. Now, nobody wants to do it really, but it’s just necessary sometimes, isn’t it?
Michael: Sometimes it is, but only, in our view, as an absolute last resort. Because when you have to go through a serious round of redundancies, it has a huge impact and quite a big toll on culture and morale. And therefore, it actually hinders your productivity, and then sales and also innovation of new ideas and products. So it’s always a last resort for us, and if you can if be very creative and come up with a number of ways to maintain your workforce, even if revenues drop by 10 or 20%, you can actually rebound much faster. And that’s why we wanna talk to you today.
Q: Right, okay. So you’ve arrived at a set of very good ideas. Which you have, before we look at what they are, you had an outdoor brainstorming session. From the photos you’ve sent to me, it looks like it involves exercise. There’s people in lycra, I haven’t looked too closely to see whether you’re one of them. Tell us about how this works.
A: Yeah, and it’s a lot of fun as well. At Vantage, we’ve long held the view and we are always looking for different ways to solve the really big challenges in business. And this is a typical one where revenues drop by 20% overnight, like a lot of businesses face with industry, or downturns, or what happened post-GFC. What would you do? What initiatives could you deploy so you don’t actually have to get rid of a lot of people who you’ve invested a lot of even time, effort, and money in, and who are really part of the family of the business. And we’ve done that for quite a while, where we pick a really big issue, and we brainstorm potential solutions to it. There’re obvious solutions, but really spend a lot of time looking at the really, really unique ones that most people don’t know about or don’t regularly do. And you may have heard the concept of open expansive spaces create open expansive thinking. Well, there’s actually a lot of brain science behind that and if you are outdoors simply hiking or walking in a park, whatever, your brain actually changes and you’re more open to thinking big picture, strategic. Better ideas come to you, basically. So we thought we’d combine all that and go for a hike last weekend. A little bit of lycra, as you say, but it was great fun two hour hike. We came up with some really, really good ideas. Some unique ideas on how to solve this particular challenge.
Q: You’re not in the United States, so you didn’t have to fight off bears and all of that sort of stuff. Apart from spiders and snakes. But apart from that, you all came back.
A: Yeah, maybe the odd possum or something, but nothing too treacherous.
Q: So let’s look at that list then. The first one is to move your staff around. Basically, put them into different roles, and put them perhaps more into sales focused roles or production roles. Stuff where they’re, you know, actually really clearly contributing to the business.
A: Yeah, this is a really, really unique one. Now, when industry downturns or the economy, the first knee-jerk reaction is, “Let’s cut down marketing, let’s cut R&D, and let’s cut our headcount.” Now, I’m a big fan of this one, because if you can move those surplus staff members into other areas of the business, you can actually generate greater revenue, which then turns into profits and actually helps fast track that issue and resolves that issue. If you’ve got surplus staff, can you move them into a sales role? You can put more people under the production line so you can actually take production from 20 weeks down to 15 weeks, which means you’ve got to bring forward a lot of sales.
It’s about being creative and not just doing the easy thing. Don’t get me wrong, it’s tough to do redundancies. It really is. But it’s the thing that everyone thinks about. So think creatively. If you can move people around the business, they cross-sell or they cross-skill, so they learn better skills. They’re still putting a lot of time and effort into R&D, which means you’re gonna come out new products and services. And then you’re gonna actually create a lot more momentum, which will then help you take market share off your competitors to regain that 20% or 15% that you’ve lost. So think differently before taking a red pen to the workforce. Can you move them around to get greater productivity, and some better products to market?
Q: All right. Okay, another one is to negotiate pay cuts. That’s not gonna go down too well though, is it?
A: No, it’s not. And we don’t really wanna talk about the obvious ones. The obvious ones here are, you know, can you negotiate some pay cuts, implement no overtime, things like that. But again, they’re the obvious ones, and you know, there’s nothing new there. And the hard thing with those is to try and sell those, because what you’re doing is they’re taking a pay cut, but they’re still working the same amount of hours. So whilst, yeah, they get to keep their job, it still has an impact on morale. What we’re big fans of, though, is moving people from full-time to part-time. Or you know, converting into a 9-day fortnight, so people actually get that time off, so they’re not working for nothing, if you like.
The other really, really powerful one which a large business turning over 2 billion, a business called Barry-Wehmiller. They were a business turning over $20 million in the 80s. They are now turning over $2 billion. When the GFC hit them, the board, knee-jerk reaction, said, “Right, what are you gonna do about layoffs?” And the founder and CEO said, “Look, we’re not gonna do it. We’re going to look at other ways to deal with our 30% drop in pipeline.” So literally within 24 hours they came back and said, “We’re gonna implement a furlough program, which is everybody has to take four weeks leave without pay. You can take it whenever you want over the next 12 months.” And the way they sold it was they said, “Well, we think it’s better that all of us,” you know, “experience a little bit of discomfort, rather than some of us experience a lot.”
Q: I think a lot of airlines did that as well, didn’t they? During the SARS outbreak, I had a lot of airline friends who said, yeah, they were gonna take the month off. They didn’t get paid for it, but everyone kept their jobs. So that’s how it was pitched to them.
A: They did. And what happened with Barry-Wehmiller, and this wasn’t planned or even contemplated, because staff really appreciated that approach, those who could afford to take more than four weeks actually started bartering. So this informal bartering system was created, where if you could afford to take eight weeks, you would say, “Okay,” you know, “George over here can’t afford it, his family is doing it really tough. I’ll take an extra four weeks so he doesn’t have to, because I’ve always wanted to do this project. I’ve wanted to just setup a veggie garden, I wanted to write a book, or whatever.” So this bartering system turned up, and it actually strengthened their culture. And the very next year, record profit. You know, and their revenue dipped by 30% literally overnight. So by having faith in your team, giving them the responsibility to work out how to do this, and they had to save $10 or $15 million, they doubled it. And then it had a massive impact on culture and record profits the next year. So think creatively: it’s not always about headcount reduction.
Q: No. Well, that nine-day fortnight, my brother during the global financial crisis, he, like a lot of people, turned to a nine-day fortnight. He never went back from that. He’s still on a nine-day fortnight, and there’s no way in the world you’re gonna get him to work full-time ever again.
A: Yeah, and people actually…because a lot of people have always got that project, whether it’s been sitting on the fridge for months, and months, and months and you’re getting nagged about it, or you’ve got something you generally wanna do, it gives you that opportunity and that flexibility. So think differently. They still saved the money that they needed to, but actually had a positive impact on culture. And you know, in corporate turnaround, we’ve seen this for 20 years. When you lose staff, it takes months if not years to get the culture back to where it was, without really spending a lot of time and effort on culture reform and issues post that. So it can have a lingering impact, which slows down your recovery, so it’s actually counterproductive.
Q: Okay, I guess the other ways are to look at how you work out that pay packet, rather than just paying your one salary. Do you divide it up a bit more, and give a greater amount based on a bonus, based on KPIs? Or do you convert some of it to equity as well, for example?
A: Yeah, and there’s been a growing use of employee share ownership schemes or ESOPs in the recent years, so you can convert your salaried staff to base of 80%, and then have a KPI or bonus structure that not only will take them to 100%, but a little bit above for that risk premium that they take. And you can go so far as to have actual equity. So convert 20% of their paid equity, whether it be voting or nonvoting rights, redeemable convertible preference shares. So effectively you might delay paying these redeemable preference shares, where basically you delay or you give them 10 to 15% of their salary as shares, and then you redeem them in 12 months’ time when you can afford to. Staff can either agree to convert those into ordinary shares later on, or get them bought back, so actually essentially getting your 20% salary cut back with some interest. But you’re gonna need to communicate this really well. And they have to have trust that the forecast, the itinerary plan you’ve got is robust, it’s sensible, and they believe in it and they know that what their part is in that. Or you can have quasi what’s called “ghost equity,” if you’re not actually giving them real shares. But think creatively. The key is to be able to communicate this in a way that people know that it’s an investment and not just a risk, and they have a very good belief they’re gonna get their money back. Or actually think of it as shares, and get a multiple return on their investment.
Q: How quickly that’s achieved depends on how hard they work as well. So there’s an incentive thrown into that, isn’t there, when they’ve got equity in the game?
A: Yeah, absolutely. And the other couple of initiatives that we’ve done a few times over the years, is where you’ve…you know, typically in a restructure or a turn around you’ll have a lot of surplus assets. Surplus vehicles or whatever it might be. And what typically happens is you might have to sell those assets at auction, so you end up getting half what they’re actually worth. So a much more clever way to do it is to say, you know, you might have a number of staff members who are looking for a new car, just to use that asset as an example. So rather than having to take a pay cut, you give them a car to the value of 20 grand. Say they want a hundred grand. You give them a car that’s worth $20,000 at market value, in exchange for a reduction in their salary for $20,000. They’re getting a car for real value, so they’re not missing out on value because they were gonna buy a car anyway. The company’s getting it at market value, or maybe a little bit less, but it’s still a lot better than what they would’ve got if they had to go to auction. Think like that. And often when you ask staff members, a lot of them put their hands up and say, “Yeah, I’ve been looking for a new car. This way I can basically salary sacrifice it over 12 months.”
The other one, which you don’t see often, and this will take a little bit of work, but if you’ve got an extra 10, 20, 30, 50 people… Say you’re an electrician based business, and you’ve got a number of surplus staff now because revenue’s dropped off. Is there another business that needs electricians, that isn’t a competitor of yours, that is doing okay? Well, you could second some staff to them for a period of three to six months, to help them with a project that’s coming up or whatever. So you know, if you’ve got peers and friends in business, reach out to them and see if they need, you know, anybody that you’ve got with the skills they need. One, your peer won’t need to pay recruitment fees to look for the next 10 or 15 people they’re looking for. And you get to take that wage cost off, but you don’t lose those people. And they get to go work for another business for a period of time. Some of them may not come back, that’s natural, but you’ve kept the door open for them to come back.
Q: Yeah, another great idea. These are all really good ideas, but as you said earlier, it all gets down to how you sell these and communicate them to the staff. And so you’re gonna tramp off into the woods again as a team, to try and look at how you do communicate this to your team?
A: Yes, that’s right, Phil. Yep, Once we come up with these initiatives, the most important thing to understand is we just sell each of these to the workforce. So we’re about to do that this week, and you know, come up with sort of one or two sort of key selling points for each of these. And then, depending on what situation you’re in, you can discuss all these with a management team and work out what’s gonna work best for that business.
Q: All right, okay. And you’ll come back and tell us about this?
Q: And that’s it for the “Vantage Performance Podcast.” You can subscribe on iTunes or listen on the Vantage Performance website. Go to www.vantageperformance.com.au, click on the Insights tab to find all the podcasts in this series. If you’d like to know more about managing your wage costs, contact the Vantage Performance team today and see how they can help you.