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An SME’s Guide to Managing People Cost in an Economic Downturn

 ‘We did not plan for this. If this situation continues, we will be bankrupt in a few weeks!’

As Nigeria’s coronavirus lockdown continues to take a toll on organisations, more so small businesses, this entrepreneur’s anxieties got me thinking about options small businesses have to manage cost in light of the dire economic impact that this pandemic pose.

It is not new, people cost is one of the biggest expenses on the income statement of any business and depending on your business size, can account for up to 70% of overall business cost.So, for many small businesses, a swift and unexpected shift in the economy like we are experiencing with the corona virus pandemic, often translates to rapid depletion in cash and at worse, bankruptcy.

Working with a portfolio of small business, we have experienced first-hand, actions small businesses are taking to minimise the impact of these changes and safeguard the future of their businesses. I do hope these ideas will help you land on a solution that works for your own business.

Salary Cuts

In the light of the national lockdown to slow the spread of covid-19, a number of companies are responding with pay cuts. With large cuts at leadership levels and graduated percentage reduction below the management team. We have seen leadership insome of the worse hit sectors completely foregoing their salary, implementing up to 50% pay cuts for management level employees and 30 – 25% for the rest of the organisation.

If you decide on implementing a salary cut, here are a few considerations:

  • Ensure no one is paid below the minimum wage
  • Communicate a timeframe for the pay reduction for example, ‘we anticipate that this is a temporary change from April – June 2020 after which further conversation and review may be required should the current situation persist.’
  • You may want to exemptlow-wage employees (e.g. drivers, cleaners etc), who are likely to feel the most negative impact of this change
  • Get the employees’ consent prior to effecting the change
  • Be prepared, some employees can decide to opt out. Make sure this is documented. Have a conversation to understand the employee’s reasons and secure their understanding preferably in writing that the period immediately after this communication will serve as disengagement notice period.
  • Where available offer severance package as contained in existing company policy or employment contract.

Unpaid Leave (Furlough)

A furlough is an employer-mandate temporary unpaid leave from work. Mandatory unpaid leave could last a few weeks or months. This is usually a preferred option to layoffs as it allows employers very easily reduce people costs without adding on new costs and safeguard knowledge accumulated about the business and industry. In addition, with replacement cost valued at about 33% of annual salary for the role, unpaid leave means a savings inrecruitment and onboarding costs when business as usual resumes, allowing for employees to easily pick up from where they left off.

If you decide on mandatory unpaid leave, here are a few considerations:

  • Figure out your critical staffing for the period. You may want to consider the work that is required, work schedule or rosters, existing performance data performance and skills required during this period. Engage them on the need to cover the reduced workload.
  • Engage and inform all employees on the change (the alternative being employee layoffs)
  • Communicate a timeframe for the unpaid leave period
  • Get the employee’s consent prior to effecting the change
  • If the situation is likely to continue after the set period, inform well in advance

Reduced Hours

Where employees are faced with reduced hours versus not working at all, in most cases they will opt for the former. Being a change in employment contract, this will require clear communication and employee consent obtained.

If you decide on reduced hours, here are a few considerations:

  • Figure out your critical staffing for the period. You may want to consider the work that is required, existing performance data performance and skills required during this period
  • Options include part-time working (2-3 days a week, 4-day a week) job sharing where 2 part time employees share the responsibilities of a full-time job.
  • Engage and inform all employees on the change (the alternative being employee layoffs)
  • Communicate a timeframe for the unpaid leave
  • If the situation is likely to continue after the set period, inform well in advance

Lay Offs

This is likely to be a last resort for employers. The Courts recognise ‘economic’ reasons as valid grounds for declaring a redundancy.

If you decide on mandatory unpaid leave, here are a few considerations:

  • The performance management process could be leveraged to exit poor performers. Between 5-10% will typically make up the poor performance population
  • Severance is typically based on existing agreements: contract & handbook. Where long serving employees are impacted, the company may want to consider additional ‘good-will pay’

Managing Change

If you are considering any of these options, we strongly recommend a clear communication strategy and a progressive implementation approach that perhaps starts off with a reduction in pay before resorting to a lay off.

It is important to note that in order to mitigate the risk of a liability, any variation in an employee’s contract of employment requires obtaining prior consent. While it is most preferred to mention the imminent change first at a quasi-townhall/village meeting, If you are still in a lockdown situation when the change decision is made, leverage technology (video conferencing) to announce to the team before following up with an email and consent form (very easily done on google or Microsoft forms).

As you look closely at your people cost, don’t forget there are other ways to cut cost (e.g. renegotiating existing contract e.g. rent, suppliercontracts, reducing energy costs & cutting operational expenses).

Finally, as it is especially important to keep employee engagement up during this time, we recommend you involve your team in brainstorming for solutions and options prior to announcing your management’s decisions.

Enitan Oyenuga is Managing Partner at HR-EX Consulting. HR-EX Consulting provides outsourced HR services to small businesses.

 

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