strategy+business is published by PwC Strategy& LLC.
or, sign in with:
strategy and business
 / Summer 2011 / Issue 63(originally published by Booz & Company)


Retooling Labor Costs

• Involuntary separation and performance management. The company should have a disciplined program of regular reviews to remove poor performers whose salaries are too high for their jobs and to replace them with new workers making a more appropriate wage. The workforce may bristle at these actions — and morale may sink — especially if the changes are construed as a way to bring in less-expensive replacements instead of as a decision to become more disciplined about performance and salaries. This rancor can be avoided if management clearly communicates that ranking employees and letting consistently subpar employees go is now ongoing company policy.

• Wage reduction. Cutting salaries should be a one-time event to get the company’s compensation for individual positions and responsibilities back in line with the overall job market. This lever is the quickest to implement, but it carries the most risk in terms of its effect on morale. For that reason alone, it should be attempted only after all the other options have been exhausted and the case for change has been made clear to the workforce.

Restoring Order to the Payroll

Setting the direction for the initiative, aligning it with the company’s overall strategic thrust, and making sure that the commitment to the program remains strong so that wage normalization doesn’t fizzle out over time are the responsibility of senior leadership. The chief financial officer or the chief operating officer, in conjunction with line management, should oversee decision making and overall planning. In addition, senior human resources managers must be closely involved in the development of this effort, because in most organizations they have the most hands-on experience and knowledge in dealing with worker skills, salaries, and concerns.

For many companies, the need to address imbalanced labor costs couldn’t be more urgent: New entrants are hiring people at deeply discounted market rates, taking advantage of today’s steep unemployment numbers, and widening the labor-cost gap with established businesses that have more entrenched workforces. However, any company seeking to meet this challenge must be ready to embark on a lengthy and extremely disciplined campaign — one that will determine the morale, skills, talent levels, recruitment potential, performance, productivity, and costs of its workforce for a very long time.

Reprint No. 11203

Author Profiles:

  • Harry Hawkes is a partner with Booz & Company based in Cleveland. He leads the firm’s global operations and performance improvement practice for the media and entertainment industries.
  • Albert Kent is a principal with Booz & Company based in Florham Park, N.J. He has more than 14 years of industry and consulting experience focusing on cost transformations — specifically in field operations; manufacturing and supply chain; and sourcing for industrial, automotive, aerospace and defense, building products, and digital industries.
  • Vikas Bhalla is a Booz & Company senior associate based in New York. He has more than 10 years of experience in developing operations and cost reduction strategies for companies in such industries as retail, media, digital, and healthcare.
  • Also contributing to this article was Booz & Company Associate Nicholas Buckner.
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store


Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.