Retrenching Some Staff VS Pay Cut For All: Pros And Cons Of Each Cost-Saving Method

As companies take steps to be more sustainable amid an evolved operating environment, managing business costs is a major step that many businesses may be considering. Depending on the industry, there can be many ways to trim costs, such as sourcing alternative raw materials, deferring non-essential projects, streamlining product offerings or others.

For many companies, the cost of staff salaries is also a significant (if not the biggest) expense. We can understand why the government’s primary support measure for companies amid the COVID-19 crisis came in the form of a salary subsidy, known as the Jobs Support Scheme.

And when there is a need to reduce staff costs, the two major ways to do so are to either implement a pay cut for the entire workforce or to retrench some individuals. We’ll look at the pros and cons of either approach.

Read Also: Here’s What You Need To Know About The Jobs Support Scheme

Restructuring Has Always Been A Tool For Companies In Good Times And Bad

Streamlining business operations, eliminating redundancies, and letting go of poor performers or those who might not be able to contribute to the company’s new direction has always been a tool that companies have in their back pockets.

Doing so in good times, while it might have made business sense, would be deeply unpopular, even though it might be more moral to do, since retrenched staff would have an easier time finding alternative employment.

In difficult times, such as the COVID-19 crisis we find ourselves in, some companies might use this opportunity to carry out long-planned restructuring exercises or decide to rechart their pre-coronavirus business plan, even if they were in a strong cash position and didn’t actually need to retrench to survive.

If they do choose to do so, they at least owe it to their employees and stakeholders to be honest about their motivations for restructuring, and provide a severance package to help affected employees land on their feet.

Psychological Impact Of Pay Cuts VS Retrenchments

Some proponents of retrenchments believe that by instituting a company-wide pay cut, the pain or discomfort is felt by the entire workforce, which might be bad for morale and affect good-performers whom the company needs to retain and keep happy.

However, one should not dismiss the impact of retrenchments, even on those who remain.

The additional workload could lead to a vicious cycle of more people resigning due to the deteriorating conditions and work-life balance. And hiring new staff later on will not completely replace the experience and familiarity lost.

Some may argue that retrenchments may lead to an increased sense of loyalty by those who were fortunate enough not to get the axe. However, this isn’t always the case, since seeing long-serving, good colleagues being let go by the company may lead those who remain to always be looking over their shoulders and wondering if they will be next.

This is doubly true if upper management isn’t in touch with the real goings-on on the ground and they retrenched individuals whom most colleagues regard as valuable, while keeping the ‘wrong’ people.

Read Also: Should You Disclose Your Salary To Co-Workers? Pros And Cons Of Having An Open Salary Culture

Human Impact Of Retrenchments Much Higher – And Might Cost More Upfront

Each person taking a pay cut of 10% is not insignificant, but it probably won’t materially change anyone’s quality of life and standard of living drastically. On the other hand, retrenching 10% of one’s workforce has huge ramifications on those affected, with concerns over their ability to service their mortgage, pay their bills, and afford daily essentials for the period of time when they are still looking for a job.

There are moral and legal responsibilities that companies owe to their employees who have toiled for them over the months, years, and decades, and any retrenchment exercise should only be undertaken with all other avenues exhausted, and the human cost firmly in mind.

Furthermore, due to retrenchment packages, letting staff go for financial reasons might actually cost more upfront. For example, in the recent round of 130 layoffs at Singapore Press Holdings, it was revealed that it would cost the company $8 million, or about $61,000 per staff member let go. Singapore Airlines (SIA) also recently announced it would slash 4,300 positions amid the COVID-19 pandemic, with retrenched staff to receive one month of pay for every year of service, capped at 25 months. 

Read Also: Why 2020 Is A Good Year To Be Expanding Your Team, If You Are Prepared To Embrace The Challenge

Retrenchments May Hurt Companies’ Revenue Generation Capabilities

Especially in knowledge industries where manpower is the primary resource, the amount of revenue you can generate is limited by the number of people you have in your team and are able to dedicate to projects.

A software company that reduces headcount now might be able to save on costs in the near-term, but it might hurt the quality and speed of future software releases or ability to take on new projects, which has a knock-on effect on future sales.

If You Let Proven Talents Go, You Might Not Be Able To Rehire Them Later On

Human resource professionals understand well how expensive hiring right is – whether that is paying for a headhunting/recruitment firm, or doing it internally, the time and financial cost of interviewing and onboarding new hires is significant. Not to mention those who end up not being suitable, with the process resetting.

Letting existing staff go not only loses the company their skills and experience, but also the staff member’s proven culture and personality fit with their team and the company. And even after the economy recovers, it might cost more to attempt to get back to the status quo, if at all possible.

Read Also: Retrenchment Should Be The Last Resort: 4 Options Companies Can Consider To Reduce Cost First

Need Financing Support During This Period?

From now till 31 March 2021, SMEs can enjoy extra financing support of up to $5 million through the Temporary Bridging Loan Programme.

Join The DollarsAndSense Business Community

For more content that helps entrepreneurs, freelancers, and self-employed individuals and learn to build better businesses, join the DollarsAndSense Business Community on Facebook.

16 Shares:
You May Also Like