Being the leader of a company means making difficult decisions, in both difficult times and when the company is thriving. These decisions aren’t made in a vacuum – business leaders rely on data to guide the decisions they make. Depending on what the decision is, this might mean internal data on how the company is improving based on past performance, or it could mean external data on how company performance compares to others and how the industry is changing.
In this particular post, we will be discussing internal employee data and how it can be used when a company needs to consider cutting costs.
Looking at the summary of employee data provided and critically analyzing the information, some questions come to mind. A few employees are listed as “essential” employees. What exactly makes that particular employee essential, especially those with low performance ratings? Additionally, is it fair for everyone to get the same bonus when resources are limited? It also appears that salaries are not aligned to performance. For instance, in sales, an employee who received a rating of 4 receives $22,000 less than an employee who received a rating of 2; even the sales team leader receives less than the employee with a rating of 2. How are salaries determined if not by performance and/or level of leadership?
With this data, we can start to think about these individuals and how they perform at work.
Quantitatively, the company is spending a considerable amount of money on bonuses across the board. If the company wants to consider cutting costs, perhaps bonuses could only be awarded to high performing employees as an added incentive for high quality work. Additionally, high performing employees are not always being compensated in a way that aligns across the department. This could be rectified as a longer term goal.
The qualitative data show that some employees are meeting manager expectations while others are not. Qualitative information from managers on why scores were awarded would be very helpful in describing the employee’s work ethic, and managers should be encouraged to add more comments to describe their employees. When decisions need to be made, this data will be helpful in determining who might not be a good fit for the company.
If 10% needed to be cut from the company spend, I personally would not recommend any personnel decisions before seeing past performance ratings for all employees. A single snapshot of employee performance cannot differentiate between chronic underperformers and those for whom a low score is an outlier. I would then recommend that all chronic underperformers (i.e. those who repeatedly receive 1s and 2s with negative manager comments) be laid off from the company, regardless of whether they are designated essential unless their manager has a very good explanation of why that position could not be filled with a higher performing employee. After this, I would look at how much money was saved and how much still needs to be cut. Depending on that answer, I would first recommend removing compensation for overtime. This is not uncommon and could save the company an additional $37,900. If that is still not enough, I would reevaluate bonuses. If drastic measures need to be taken, bonuses may need to be eliminated until the company is in a better financial position. If a less drastic approach can still meet the 10% reduction, I would institute a merit-based bonus. Only high performing employees (i.e. those with ratings of 3 or 4) would receive a bonus while lower performing employees would not. This would lead to lower costs while also adding an incentive for high quality work. I would also recommend that, in the future, employee compensation should be based on performance and leadership level. This is more forward thinking as it is difficult to make salary changes once an employee has received a raise, but would save money in the long run and make compensation more fair.
To defend this strategy, I would remind management that we cannot afford to have underperforming workers. I would show the cost saving and consider quantifying efficiency for how we would operate if we only kept our best employees. If overtime and bonus cuts are also needed, I would make sure to illustrate the cost savings and how merit based bonuses could also improve work performance.
As with all difficult decisions, evaluating the data effectively and defining why you choose a certain course of action is vital. I would make sure I had all the appropriate data (i.e. more information on employee past performance and more qualitative data from managers) before I made any suggestions. I would also make sure to quantify employee efficiency, not just cost, and how company performance could benefit. This would hopefully be enough to cut costs without affecting how the company performs overall.