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The money paid out to workers for their services is the biggest expense of any business. It can account for as much as 70 percent of total spending. These costs will only rise; U.S. wages for hourly workers have increased steadily over the last several years and are predicted to continue on the same trajectory. At the same time, the data shows that business owners feel they lack control over their profit margins. When asked how they plan to gain control, they cite curtailing labor cost as their primary method.
The phrase “controlling labor cost” often conjures up images of cutting costs across the board, reducing wages, and firing employees. Yes, these would all lower overall costs for a company, but they are drastic actions that should only be taken when absolutely necessary. And, of course, products and services offered to customers will suffer, which, in turn, means sales will suffer.
You likely feel that same pressure to reduce the labor budget for your enterprise. So, how can a business owner tackle labor cost strategically and optimize operations without rocking the boat?
Here are 11 tips for controlling labor costs and boosting employee productivity. These strategies are designed to strengthen your company instead of weakening it, preparing it for new growth. Employee morale and productivity will improve and you will gain increased visibility into your spending, including how it is put to use. Keep in mind that streamlined, comprehensive time and labor software and solutions are a key part of staying on top of labor costs.
Tip #1: Know Your Labor Burden Rate
To curb your labor expenses, you’ll need to have an accurate picture of what you’re paying each employee, beyond their basic salary or hourly rate. This total amount is known as your labor burden rate.
To arrive at the annual labor burden rate for each employee, add their annual salary or hourly wages, any extra compensation such as overtime and bonuses, your share of payroll taxes and mandatory insurances for the employee, and your portion of fringe benefits—such as 401(k) match and health insurance contributions.
Knowing the exact cost of each employee can help you detect and fix hidden areas of overspending.
Tip #2: Optimize Employee Scheduling
With a clear schedule in place, everyone knows what to expect from their paychecks. This is also a helpful reference in targeting and eliminating extra overtime. For the staff running this restaurant, for example, monetizing their product led to a clearer understanding of labor cost and how much the restaurant gains from a single hour of work.
By understanding what each work hour entails, you’ll know how much is needed from your employees in order for you to stay in the black. If you have staffers who would be receptive to working 4 days a week instead of 5 days for better home-life balance, consider the advantages and the savings. It may also be worth reevaluating your telecommuting permissions, since working from home does create some minor savings.
Tip #3: Reduce Perquisites (“Perks”)
One way to directly curb your labor burden is to reduce Perquisites commonly referred to as "Perks", or reducing employer voluntary benefits, such as health insurance, flexible spending accounts, and retirement plans. You can make adjustments so that workers pay a slightly higher deductible, or you might convert pension plans to profit-sharing plans. Try to create an impact across the board; management and the C-suite should be included. Targeting people on the bottom rungs of the ladder and leaving the higher-ups unscathed will sour relations with your staff.
Tip #4: Change Vacation Options
According to a study conducted by Harris Interactive, 54 percent of U.S. adults say they are expected to work while on vacation. In such cases, the vacation isn’t truly a getaway. As a result, a small percentage of companies have been experimenting with unlimited time off. In return, the expectation is that some work will be completed even while the employee is away or out of town. Bigger companies in the public eye such as Netflix are doing it, and so are smaller companies. In most cases, the positives of this strategy appear to outweigh the negatives, but not all the votes are in yet.
If this doesn’t seem like a realistic option to you, consider combining vacation and sick leave. Placing all time away from the office in one PTO bucket encourages autonomy, demonstrates greater trust, decreases leave-administration costs, and gives employees more flexibility, thereby increasing productivity at work.
Tip #5: Study Communications Between Departments
Is your HR team overlapping with accounting? Is Marketing performing tasks that are better left to the folks in Sales? Are two people in the same department doing the same tasks without realizing it? While not uncommon, this “doubling up” of duties is a waste of money. Establish a review process to make sure each job is only being tackled once.
Tip #6: Boost Productivity
Is your technology up to date? Are your employees properly trained? By supplying top-notch resources you automatically rein in labor costs and reduce employee turnover.
Tip #7: Work Overtime Before Hiring New Employees
If the applicant pool for your open position isn’t qualified enough to make a hire, it will cost less in the long run to pay your existing staffers overtime instead of hiring someone who isn’t qualified enough. Overtime is the more affordable choice in this scenario rather than making a “panic hire.”
Tip #8: Become Agile
It isn’t just a catchphrase. The agile philosophy focuses on turning big or near-impossible problems into multi-step journeys with reachable goals.
Tip #9: Focus on Employee Retention
Attracting and keeping the right people in-house must start at the very beginning. Improve employee retention by implementing comprehensive applicant searches and training. Ensure people are in the right seats doing the right jobs, and that they are happy with their managers. In the book First, Break All the Rules, Gallup interviewed a million employees and 80,000 managers, and found that job satisfaction was linked, first and foremost, to the employee’s ability as a manager.
Tip #10: Cross-train Employees
Teaching someone a new skill set keeps the job interesting. Cross-training also increases a worker’s intrinsic value to your enterprise and assists with coverage when people are out sick or leave unexpectedly.
Tip #11: Automate and Outsource Tasks
Review your procedures and upgrade where possible. The right software and services partner can help to reduce labor costs within a matter of days or weeks. For example, by automating scheduling, a manager can quickly obtain insights into work habits through automated data reports.
Conquering Labor Cost Challenges
Controlling labor costs is not about swinging the axe and eliminating staff. It is also not about ditching commission or freezing wages. Instead, take a hard look at the variables directly influencing the rates of labor cost spending and consider restructuring for the sake of efficiency.
This means that when labor costs change—as they do on a regular basis—the business can make accommodations instead of moving into costly crisis mode. Read more about the time and labor solutions from Excelforce.