Reducing Labour Costs

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Even though labour costs in the UK are below the EU average, they still make up around two-thirds of the overall cost of production.
Cutting down these costs can be a difficult topic. Just reducing compensation or laying off employees can lead to sharp decreases in productivity of remaining employees due to poor morale and demotivation.

Therefore, terminating contracts should be the final step, used only when the approaches below do not deliver the results needed. There are multiple ways to reduce labour costs without immediately laying off parts of your workforce, so make use of them!

In the following some of these initiatives to lessen labour costs will be introduced. Every company is different and requires different approaches but the ideas mentioned in this article are a good starting point for any form of company.

Optimise your remuneration structure

Wages tend to move upwards even when markets do not. Ensure your pay schedules match current levels of payment so you are not paying your employees significantly more than what they would earn in the market.
Reducing wages is an extreme step to take so sometimes it is better to freeze them instead until market wages catch up with the wages paid in your firm.
Alternatively, you can make use of payments in kind to reduce salaries without cutting overall remuneration.

Often introducing a pay-for-performance system can help reduce salary expenditure. You will also have the option to decrease the fixed salary and increase the variable determined by performance to ensure productive employees are paid more than less productive ones. It is crucial that your compensation policies are consistent and comprehensible organisation-wide.

If these methods prove insufficient, salary reductions may be required. Ensure in-depth analysis of employees and their salaries to ensure fair and reasonable treatment of employees.

Managing employee turnover and filling vacancies cost-effectively

Reducing employee turnover is essential for effective cost reduction since recruitment, selection and training of new employees are high cost activities. Furthermore, high employee turnover negatively impacts quality, production times and efficiency and thus is to be avoided.
To reduce employee turnover, ensure every new employee is the best candidate for the job and provide a good work environment they enjoy working in.

Before recruiting a full-time employee, make sure you are actually in need for one. It is not always necessary to fill a vacancy immediately, sometimes tasks can be redistributed among current employees to avoid the costly process of hiring a new employee.
Alternatively, you can aim to hire long-term unemployed or interns to fulfil easier tasks to reduce salary expenditures.

Consider investing in employee training, it is a good way to improve your employee quality. As your employees become more efficient and proficient in their jobs, you are paying the same salary whilst having more productive employees.

Adjust working hours

Overtime pay is usually considerably higher than a standard salary so prevent your employees from working overtime to reduce this expenditure.
Many employees, especially those with families, are happier working flexible hours and are willing to accept a lower salary in return. So arranging well working flexitime agreements can help reduce expenditure without reducing employees’ working hours.

Automate and outsource

Technology has improved strikingly in recent years and is now able to carry out non-critical tasks in companies whilst being inexpensive and user-friendly, so make use of it!
You can also outsource to external firms, even if you pay the same base pay for outsourced work, you do not incur additional costs of employment.
Moreover, you can cut costs by hiring temporary employees to help out during busier times of the year instead of hiring full-time, full-year employees.

The last resort

Only when none of the methods above yield the results required should you resort to reducing your workforce.
This can be done in different ways, individual or collective layoffs are the harshest measure.
Before laying off employees, aim to make use of contract suspensions, leave of absence opportunities and early retirements which can help preserve employee motivation and morale.

Whichever methods of reducing costs you chose, make sure to communicate with all parts of your organisation to maintain trust and good relationships.

Communication is key.

Inform all levels of your organisation about why you are taking the steps you have decided on, how they will prevent worse scenarios from happening and ensure all individuals concerned know how they will be affected by the change.



Sara Mohn
Sara Mohn
Content Writer at NoviCap

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