Managing and Controlling Labour Costs
The cost implications of decision such as updating the pay structure are critical for making sound
decisions. Budgets account for these costs. Creating a compensation budget involves trade-offs.
Financial planning requires understanding the potential returns gained from its allocation. Most
companies have not tried to analyze the returns from their compensation decisions. Compensation
strategy influences effectiveness by its influence in helping increase revenues or returns as well.
Controlling Employment: Number of Employees and Hours
Organizations often reduce their workforce to cut labour costs. A major advantage of this is that it also
reduces benefits costs, something that a pay cut or reduction in hours does not achieve.
Several potential problems with workforce reductions:
1. If exit incentives cannot be effectively targeted and all employees are eligible, those most
employable and most able to find another good job may be most likely to leave, with the result
that the company has paid its top performers to leave.
2. Workforce reductions can harm employee relations, particularly if deemed unfair.
3. Organizations that make large workforce cuts also experience greater voluntary turnover.
4. Workforce reductions are expensive in terms of administrative costs, disruption of work
processes and customer service, severance pay, and exit incentives.
5. Some companies are running so “lean” that there may be little room to cut the workforce without
reducing production or service levels.
6. If cuts are made too deep, the organization will be poorly positioned to increase revenue when
business picks up again.
Two different groups of employees:
1. Core employees: Strong, long-term relationship is desired
2. Contingent workers: cover short, specific time periods (ex. Seasonal workers)
Control Salary Level: Top-Down
Top-down budgeting requires top management of each organization unit to estimate the pay-increase
budget for that unit. Once the total budget is determined, it is then allocated to each manager who plans
how to distribute it among employees.
Several factors influence the decision about how much to increase the average pay level for the next
1. Current year’s rise: the percentage by which the average wage changed in the past year (see
2. Ability to pay: Financially healthy employers may maintain their competitive position or share