Cutting Payroll? Think Beyond the Pink Slip

 

Difficult times present especially difficult challenges for small business owners. Perhaps the most painful of all: terminating employees because earnings are down.

 

When business is bad, you have no choice but to reduce expenses. However, cutting payroll doesn’t automatically mean resorting to layoffs. Before you get to the point where you’re drawing up pink slips, create a payroll reduction plan. Your plan should address three points: where you’ll cut, when you’ll cut, and how to minimize the damage moving forward.

 

 Layoffs are a surefire way to cut operating costs, but it’s also the most traumatic. That’s why is wise to plan this in advance, as opposed to reacting in panic because you’ve waited to long. 
 
If you do have to implement layoffs, base your decisions on employee capability and contribution, not seniority or personal need. Create a list, starting with your most productive personnel and working down to the most marginal. That way, if you have to start cutting, you’ll know where to start. 

Once you determine what emergency actions you’ll take, identify your tipping point for setting that plan in motion. This is your point of no return: if business falls to X, then you’ll enact Y.
 
It’s up to you to determine what your threshold is. Every business has its own tipping point. For example, you might tie yours to cash levels such as receivables, inventory levels, aging of outstanding bids, number of bids, backlog in hours or dollar.

 

The point is, when you set an objective, measurable point of action, you remove some of emotional upheaval from the process.
 
Whatever form of payroll reductions you make, recognize that your employees will be traumatized. It’s up to you to set the tone. The best approach is to be positive and upbeat, but truthful about the challenges facing your company.   
 
When announcing cutbacks, look your employees in the eye. Be frank, be real, appeal to their sense of reason. Remind them of the greater economic picture: “I know you’re disappointed…I’m disappointed, too. But people in the unemployment line have even greater hardship then we do.”
 
Leadership starts at the top. When asking employees to make financial sacrifices, you must make those sacrifices, too. Your people must see that you share their pain.