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Keeping Down Payroll

Wednesday, June 23, 2010   By Mike Reddy


As a business coach I know that in soft economic times there can be pressure to cut back on payroll and that usually means laying off employees. As a tactic it works, but this strategy reduces your productivity and can end up costing you in the long run. You will have lost any investment you made in their training, lost their knowhow and will be stuck with the cost of hiring a replacement sometime in the future when business starts to pick up again.  So avoid it if you can. If laying off employees is the only option, give careful thought to how you can maintain production and customer service so as not to plunge into a downward spiral of poor service leading to increasing customer desertion. It's a question I get asked a lot as a business coach, so here are some suggestions for how to slim the payroll burden.

Slim the payroll

Reduce pay and eliminate raises: a reduction in pay won’t be popular but if the alternative is redundancies among the employees they might well agree to go for it. At least they keep their job (and you save on payroll) until business picks up again.

Cut back on work hours: this will reduce payroll without entirely losing the employee. This can be done by decreasing daily hours or reducing days per week or moving to so many days per month. A reduction in hours may be viewed as preferable to having no job whatsoever. Sharing the pain out among employees will be better for morale and you get to keep people on hand for when times improve.

Replace monetary with nonmonetary incentives: offering the use of your holiday home (check with your tax adviser for any issues that might arise) or extra time off in lieu of a money bonus can show that you understand your employee’s disappointment in not receiving a cash bonus but want to reward them for their hard work.

Encourage employees to take time off without pay: canvass employees for those who would be agreeable to taking a period of time off work without pay. The deal must be that they are guaranteed their job back at the end of the specified period.

Incentivise employees to leave: the least unpleasant way to downsize is to let natural attrition take care of the job by not replacing employees who quit or retire. If normal attrition will be too slow to reduce numbers to what you need/can afford, then offer employees an incentive to terminate: grant early retirement with full retirement benefits or offer an attractive severance package. Make clear this is for this occasion only.

Make use of independent contractors: hiring is a long term commitment. Until things improve, soak up extra workload using independent contractors instead of putting on workers.

Insource: maybe some jobs you are currently outsourcing can be economically brought back into the workplace to be done by underutilised employees. Be careful not to breach employee or supplier contracts. Do this only if there is a distinct cost/benefit advantage over the outsourcing deal.

Reduce the cost of producing payroll

The actual cost of producing the payroll (calculating pay, producing cheques or making deposits and keeping track of employee information) is itself an area where savings can be made.

1. Outsource payroll: organising each payroll is a time consuming (read as costly) process with an element of danger added because of the possibility of making a mistake with the regulations and procedures that need to be navigated and the forms and returns to be filled in to get it right. It may be more cost effective to outsource payroll to an online service provider who will carry out all processes in accordance with the latest regulations, insert this information into the correct forms and get salaries deposited into your employee’s bank accounts allowing you to work ON getting the business right (perhaps with your business coach close by).

2. Use direct deposit for salaries: a good way to save money is to use direct deposit of payroll (DDP) in place of issuing paper payroll cheques. There is a significant cost differential between an online transaction and the processes around preparing and issuing cheques.

3. Extend the payroll period: switch from a weekly to a biweekly or monthly payroll period to reduce processing costs.

The best rule of thumb for implementing any restructuring of work practices is to be honest with employees upfront and lay out the reasons that make the changes necessary for business survival. You also need to be mindful of the terms of existing union agreements and work with the union to achieve a conflict free alteration of procedures. And always take expert advice in labour related decision making to avoid breaching labour regulations.

Remember to discuss with your business adviser or coach before taking drastic steps.  Often there will be other ways, better ways, to achieve your goal without compromising your future business performance.

Any ideas or comments?  I would love to hear them!

Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.