Performance management entails the process of identifying the bond between individual behaviours and organizational strategies and aims to mould performance according to organizational goals, which have been created by managers and their subordinates (Landy & Conte 2009). Performance and reward management are interlinked phenomena and performance management is crucial to reward management. Reward management entails the notion of development of strategies, policies and processes in order to appreciate the contribution of people towards the organization through both financial and non-financial ways (Armstrong 2007). Reward management aims to formulate and put into effect reward systems for meeting the needs and requirements of both the organization and its stakeholders. It requires that employees are rewarded without any discrimination and bias and according to their value in the organizational hierarchy. The financial means of reward include pay and employee benefits whereas nonfinancial means include recognition, professional advancement opportunities etc (Armstrong 2007). It is argued that in strained economic times or in the face of low business performance, employers are faced with the challenge of cutting down the payroll costs- an aspect of reward management. A decrease in the rewards has an impact on the performance on the jobs as well as the behaviours of the employees. This paper discusses the various ways that can be used to reduce payroll costs in the context of promoting wider corporate goals and plans.
Responding to Recession
Economic downturns are one of the most significant factors that affect payroll costs. Inflation and recessions put increasing pressures on the employees to take drastic measures to retain their workforce while making spending prudent. An economic downturn has an impact on the jobs and develops a job market classically compromising of demands for jobs. Workers who have been laid off or are demotivated constitute this market. Such an atmosphere is not productive for the economy as a whole, and employees look for options where they can motivate employees while keeping expenditures frugal. Employers do not want to cut down their workforce but it is not possible to increase the salaries during such times. Therefore different companies employ a range of measures that help them to retain their workforce while promote their corporate goals. One way of doing this is by making the working hours more flexible. This cuts down the billable hours without causing a decrease in the total number of employees (Ford 2008). Ford (2008) talks about how building companies have responded to the economic meltdown brought about by the recession. In UK, a major proportion of the wealth is stocked up in the housing industry and hence with the advent of the recession, building companies have suffered the most. In order to retain their employees, some building companies have focused on an increase in investment in talent management. The training being given to the employees will not only motivate them but would also promote the interests of the companies by retaining their best people (Ford 2008).
Responding to 9/11
Laying off employees is a tough call for any manager. In the case of employees who have been serving the company for a very long period of time and have developed an intimate connection with it, laying off does not merely manifest itself as a personal toll but also has a negative impact on the company since it is losing skilled and talented workers. Losing skilled workers means that the company will have to invest again in recruitment and training of employees once conditions improve. Since payrolls compromise of more than one-third the expenses of a small organization, reduction of the payroll costs is seen as an economical way of counteracting falling sales. In light of the economic downturn brought about by the September 11 disaster in the US, about 25% of the managers of small companies reduced the number of hours the employees worked or laid off employees. Also more than 90% of the managers limited their hiring plans. It was reported that only in January, four months after 9/11, businesses with a workforce of less than 50 workers in the US laid off 175,000 jobs, as reported by the payroll firm ADP (Richmond 2009). In tough times such as these, employers can reduce payroll costs by giving bonuses. This is especially the case if the bonuses accredit to company performance. A decrease in the share prices means that the payouts will also fall, particularly for financial services. In the financial services department, employers can opt for clawback bonuses which have the characteristic of being retracted or for deferred share options (Ford 2008).
Strite Design and Remodelling
As discussed above, employers opt for methods which avoid the loss of talented, hard-to-replace workers. The primary strategy that is employed is tightening the unimportant expenses of the company. These include cancellation of travel and business meals and delaying or calling off investments in retail goods which have a greater selling price as compared to other products sold by the organization. Some businesses also avert layoffs by asking employing to go for unpaid vacations (Richmond 2009). In the face of the economic upheaval of 9/11, the Strite Design and Remodelling responded in a number of ways. The prime element that allowed the managers of the company to implement changes was effective communication with the employees. The initial step taken was the reduction of nonessential expenses. These included finishing bottled water supplies in the office, postponement of the office renovation and washing company trucks themselves instead of sending them to car washes. This saved the company $1900 per month. The subsequent changes were introduced in the payrolls. The aim of tightening the payroll was to balance the budget. Instead of working 40 hours per week, the company staff worked 32 hours. There were seven project managers working as well and each week, one of them used to work 32 hours instead of 40. The managers of the company reduced their pays and a woman was given maternity leave. The three employees who were laid off were those whose work could be done with relative ease by the remaining employees (Richmond 2009). This example shows how the managers were able to bring about cuts in payroll costs while balancing budget.
Presenteeism is another domain that can be utilized to reduce payroll costs. Many managers are unaware of this concept. It is the complement of absenteeism and pertains to the reduced productivity occurring when employees come to work despite the fact that they are sick. This means that they are not performing to their mettle and are unable to concentrate either because of their illness or other life problems. Latest studies in the matter have shown that presenteeism costs almost 8 times more than absenteeism to managers (OEHN n.d.). The reason why managers fail to take notice of it is because it is a relatively hidden cost. It is looked upon as a threat to the business because it significantly affects the productivity and capacity of the employees. Presenteeism is responsible for more than 60% of the worker’s total lost productivity and medical expenses. Cigna Behavioral Health reports that presenteeism accounts for an estimated cost of $2000 per year per employee to the employer. Employees who are not performing optimally result in losses worth billions of dollars to their employers. Presenteeism is worse than absenteeism because unscheduled time off has the maximum effect on productivity and morale of the workers and the profits generated (Sitter 2005). According to a survey conducted by the CCH, the three major reasons for presenteeism were increased workload, dearth of choices for reducing the workload, and a hesitation for utilizing vacation time for illnesss (OEHN n.d.). Given these facts and figures, it can be gleaned that addressing presenteeism can be a useful means of reducing payroll costs.
Most managers use disciplinary action as the main solution to the problem of absenteeism and presenteeim. However, in the Unscheduled Absence Survey conducted by CCH, it was found out that using disciplinary action to stop employees from taking too many sick leaves can encourage presenteeim (OEHN n.d.). The solution to the problem of presenteeim lies in open communication with the employees. Managers need to convey to the employees what their stance is regarding taking sick leaves. The effects of coming to work should be communicated such as possibility of infecting others, more stress on the illness etc. However managers need to make the employees understand the situations in which they are permitted to take time off and when it is agreeable for them to return to work. Some companies who are facing problems of presenteeim have adopted the practice of sending sick employees back home. Also, sick employees are encouraged to telecommute from their homes. Giving employees paid sick leaves and unpaid time off is another means of reducing payroll costs. The National Partnership for Women & Families reports that if employees were allowed only seven days of paid sick leave, there would be net savings of more than $8 billion each year. These net savings would be compounded by other benefits such as a fall in turnover, increased productivity and reduced chances of transmitting infections to other workers in the company (OEHN n.d.). Another way of tightening payroll costs is that instead of allowing employees to take as many days off as they want, they are given a fixed number of paid days off. All the days that they would take off in a year can be aggregated together and offered as a single collection of days. It is up to the employees how they use these days (Schaefer 2007).
Motivation and Gainsharing
Developing effective communication and boosting the motivational levels of the employees is an effective way of reducing the payroll costs. At one hand, these measures will increase the productivity of the employees since they will be encouraged to work harder. On the other hand, these measures will bring down payroll costs due to an increase in the productivity. One way of encouraging the productivity of the employees is by gainsharing. Gainsharing entails the development of plans which connect the workforce to the company’s productivity (Mondy 2008). The increased productivity leads to an increase in the company performance and the employees are rewarded by an incentive payment. There are a number of gainsharing programs including Rucker, Scanlon and Improshare plans. The advantage of gainsharing is that the people strategy of the company is brought in line with its business strategy (Mondy 2008). Gainsharing plans attempt to engage and mobilize all or most of the employees towards the achievement of the goals of the company while increasing profits, reducing costs and incrementing the throughput. Taking the example of the Scanlon plan, one can see that employees are promised financial incentives if they are able to come up with suggestions of cutting down labour costs. These suggestions are analyzed by an employee-management team. The savings made from reduced labour costs are calculated as a “ratio of payroll costs to the sales value of what the payroll produces” (Mondy 2008). If the suggestions are able to deliver what they have been expected to, causing a fall in the payroll costs and increasing the productivity and profitability, the employees are given a financial reward. Gainsharing increases participation of the employees in the administration and management of the company (Shields 2007). The formal interaction of the employees contributes to increased job satisfaction and motivation to work; thus promoting productivity.
Using job analysis
Job analysis can also prove to be a useful means of tightening payroll costs. In order to do so, managers should go through all the job analyses and identify any missing gaps or factors that they give rise to unnecessary labour costs (Gordon 2008). These gaps and factors help the managers to collect information that might aid them in reducing payroll costs. For example learning about the time the job starts allows the manager to identify any time lost if the employee is not available; that is, if the employee is not available at the time of the start of the job, the manager can reschedule the job in order to recuperate working hours lost. Another factor that needs to be analyzed is the working hours lost for tasks the employee does not perform in normal routine. If the job analysis sets out time for tasks that the employee normally does not have to perform, the slot can be given to some other task; thus saving on the working hours. The managers can also reduce payroll costs by analyzing which tasks are performed by more than one employee. If there is no need for a task to be performed by more than one employee, it can be removed from the job analysis of the other employees and new tasks can be allocated to them instead. Moreover eliminating any tasks which do not contribute towards the operating efficiency of the business can also result in lowered payroll costs (Gordon 2008).
The job analysis can also help the manager revisit the competency and skills required for the performance of the job. Extra labour costs arise if the company is paying a high calibre employee for a job that is not as skills intensive. In such situations, the company can replace the employee and pay him or her according to the skills required for the job. Every profession requires a certain degree of talent and high-performing employees possess a set of intrinsic skills. The job analysis gives an idea about the jobs that require the employee to have a certain degree of talent or skill to perform it well. For example, for a beauty salon, good communication skills and hygiene are important qualities. The people recruited should not only have the intrinsic set of qualities that the job requires but should also have the unique qualities required for an employee working in that profession on the whole. This means that the employee is a follower of the culture of the organization (Gordon 2008). Thus hiring people keeping these set of values in consideration can allow managers to bring more efficiency into their payrolls.
Payroll costs reduction in hospitals
For specific organizations, specific payroll cost reduction systems can be put into place. For a hospital, knowing that the working hours vary can be a useful way of cutting down payroll costs. Doctors and other allied health professionals can be instructed that the working hours are not guaranteed and they would have to return back home after the cases are over. When implementing this change, managers fear that the motivation of the staff would decrease since they are not being given fixed hours. Managers also dread that they may not be able to recruit talented and qualified staff. However, Kurtz (2010) is of the perspective that this change can be enforced by communicating it in a kind and just way. Moreover the effective implementation of the change is also required for the overall change to be successful. Both these traits are essential for ensuring that there is no effect on the morale of the employees and difficulties do not arise in hiring staff. Susan Kizirian, working for a surgery centre, asserts that not guaranteeing hours does not affect the satisfaction of the employees. A survey was carried out to investigate motivational levels after this protocol was implemented. It was found out that the employees were satisfied despite the lack of guaranteed hours and call-offs. If surgeries can be rescheduled, the schedule can be condensed and staff called off for that day. This requires the cooperation of surgeons but once implemented, it can lead to major payroll costs reduction. By bringing together similar caring services, such as pre-op and PACU, the requirement for registered nurses decreases. This allows for further tightening of payroll costs (Kurtz 2010).
The company can also save up on labour costs by replacing employees hired for payroll systems by payroll machines. The administration process can be made more efficient and streamlined by using technology. The use of payroll software has been increasing over time, with statistics attesting to the fact that such systems are an effective way of reducing labour costs. One such system is the Absent Management system. The Absent Management system helps to regulate and automate the various aspects of payroll such as maternity leaves, accruals and sick leaves. The American Payroll Association reports that companies which do not use the Absent Management give away about twelve hours of extra vacation each year to each employee. In a company of 2000 workers, this amounts for 1000 days of vacations (Craig 2011). This is a huge loss in terms of labour savings that is incurred on the company each year. Companies which depend on manual methods of calculating and closing the payrolls spend time and resources on retroactive adjustments resulting because of errors or grievances. Using an automated system would decrease human errors and improve the efficiency of the HR department. An automated system of generating payrolls also decreases the risk of compliance violations (Craig 2011). This is because it is hectic for HR professionals to remain updated with the changes being introduced in HR rules. With an automated system, these changes will be fed into the system on a constant basis and will be applicable to subsequent payroll calculations (Craig 2011). Therefore an automated system can save the HR department from laborious calculations, allowing the generation of salaries easily and keeping track of leaves and salaries effectively.
There are a number of ways that can lead to the reduction of payroll costs. Strategies employed for decreasing labour costs vary from organization to organization. Also the type of profession impacts the measures managers take. Summing up, managers can enforce an assortment of strategies for tightening the payroll costs such as laying off employees, giving bonuses, investing in talent management, reducing working hours, cutting down salaries, gainsharing and using job analysis. Presenteeism is not well known amongst many employers; therefore knowledge about the hidden threats that it poses along with possible solutions to manage it can contribute towards the reduction of labour costs and increase the operating efficiency of the business. Hospitals can reduce labour costs by not guaranteeing hours and sending staff back after cases. Moreover, using technology to calculate payroll is also an effective way of reducing payroll costs.
Armstrong, M 2007, A handbook of employee reward management and practice, 2nd edn, Kogan Page Publishers, London.
Craig 2011, Using Absence Management to Manage Payroll Costs, WordPress.com, viewed 1 May, 2011, <http://versultwfm.wordpress.com/2011/01/04/using-absence-management-to-manage-payroll-costs/>
Ford, E 2008, Pay under scrutiny as recession bites, The Times, viewed 1 May, 2011, <http://business.timesonline.co.uk/tol/business/career_and_jobs/graduate_management/article4339305.ece>
Gordon, LM 2008, The Use of Job Analysis to Actually Reduce Payroll Costs, GEC Consultants, Inc., viewed 1 May, 2011, <http://www.gecconsultants.com/articles/reduce_payroll_costs.html>
Kurtz, R 2010, 3 Ways to Reduce Payroll Costs Without Impacting Care Quality, ASC Communications, viewed 1 May, 2011, <http://www.beckersasc.com/asc-turnarounds-ideas-to-improve-performance/3-ways-to-reduce-payroll-costs-without-impacting-care-quality.html>
Landy, FL & Conte, JM 2009, Work in the 21st Century: An Introduction to Industrial and Organizational Psychology, 3rd edn, John Wiley and Sons, Massachusetts.
Mondy, RW 2008, Human Resource Management, Pearson Education India, New Delhi.
OEHN n.d., Presenteeism: Employer Solutions, OEHN.net, viewed 1 May, 2011, <http://www.oehn.net/MD%20Q2%2008%20Employer%20Solutions.htm>
Richmond, R 2009, How to Cut Payroll Costs Without Layoffs, Bloomberg Businessweek, viewed 1 May, 2011, <http://www.businessweek.com/magazine/content/09_64/s0904048707309.htm>
Schaefer, P 2007, The Hidden Costs of Presenteeism: Causes and Solutions, Business Know-How, viewed 1 May, 2011, <http://www.businessknowhow.com/manage/presenteeism.htm>
Shields, J 2007, Managing employee performance and reward: concepts, practices, strategies, Cambridge University Press, Cambridge.
Sitter, D 2005, Presenteeism: The Hidden Costs of Business, EzineArticles.com, viewed 1 May, 2011, <http://ezinearticles.com/?Presenteeism:-The-Hidden-Costs-of-Business&id=40408>