Payroll Cost in Today\'s Increasingly

Payroll Cost

In today's increasingly globalized, hyper-competitive world, organizations across all industries are being challenged with the task to eek out more and more profit. This rise in competitiveness for organizations is compounded by current economic challenges being felt in geographic regions all around the world, including the United States and the European Union. For these reasons, companies are under increasing pressures to reduce their payroll costs. This paper will evaluate the range of ways by which payroll costs can be reduced, while taking into account the need to maintain a focus on the achievement of wider corporate goals and plans.

Reducing Payroll Costs:

In many organizations, payroll is one of their largest expenses. In fact, in small businesses, "salaries and wages typically account for 60% to 80% of a small company's expenses" (Richmond, 2009). As such, when organizations look to cut costs, payroll often is one of the areas that is scrutinized first. In fact, in January 2009, according to ADP, a nationwide payroll firm, organizations with fewer than 50 workers reduced their staff by 175,000 employees, in that month alone. Laying off employees may be one of the most direct ways to reduce payroll expenses; however, this strategy can have significant negative impacts.

Laying off employees, as a means of reducing payroll costs, can result in reducing employee morale and productivity, for those who remain on board ("Laying off," 2009).

As Richmond (2009) notes, "losing highly skilled workers can inflict long-term damage on a business, making it hard to bounce back and forcing managers to spend precious time and money recruiting and training when conditions improve." Additionally, workers who remain with the organization will be charged with picking up the additional workload, which can result in decreased job satisfaction and increased turnover in these remaining employees, resulting in higher costs as well.

Centralizing operations involves changing the organizational structure to centralize tasks that were previously disparate. This strategy consolidates tasks into a shared services environment, allowing the organization to perform the same number of tasks but with reduced human capital overhead costs. Many organizational support services are good targets for this type of cost-savings options, including: payroll, HR, accounts payable, and benefits (Rist n.d.). A reduction in the quantity of workers is needed as the employees are able to work more efficiently and redundancies in processing information is eliminated.

Rather than laying off employees and reducing workforces through centralization of support services, there are other means an organization may employ to reduce payroll costs. Reducing worker hours can result in significant savings, while keeping critical employees on staff. Eliminating overtime too can be a large reduction in payroll expenses. In one instance, a San Francisco tea company eliminated overtime hours for their employees and reduced payroll expenses by 7%. Lastly, asking employees about their ideas for ways to reduce payroll costs can often result innovative ways to save money. Employees may be willing to make cuts, such as reduction in hours or reducing perks, that the organization had not considered, as an alternative to laying employees off ("Creative ways," 2009).

The use of independent contractors is another innovative strategy organizations can use to cut payroll costs. These workers, often known as consultants, are perfect for filling short-term organizational needs and to reduce costs. These workers are not direct employees of the organization and therefore do not have taxes withheld or matched, nor do they received fringe benefits owed to other employees (Stevens & Karpinsky, 2009). These two facets can add up to huge savings for an organization. However, there are risks inherent to this strategy. First and foremost, contractors, by definition, rarely have a long-term loyalty to the organization, therefore this can result in increased turnover, especially when a contract is complete. Additionally, because of the transient nature of their work, independent contractors often require a higher hourly wage than a full-time employee. However, despite this, the reduced costs often still make this a cost-effective relationship when looking to reduce payroll costs.

Lastly, merit pay is another way organizations can reduce payroll costs, in lean times, while rewarding employees who go above and beyond the call of duty. With appropriate merit pay systems, organizations can "encourage creativity and innovation, improve profitability, engage employees in performance improvement and project completion, and enhance sales growth" ("Consider converting," 1999, p. 8). As Rick Beal of Watson Wyatt noted, employers need to shift their resources away from paying employees to show up and instead link their pay more closely to performance. In this way, organizations are better able to manage payroll costs. According to van Dijke, de Cremer, Bos, and Arjan (2009), merit pay has been shown to not only promote productivity, which results in reduced payroll costs, but also is perceived to be a fairer distribution of earnings by employees, increasing job satisfaction.

How Payroll Reduction Strategy Impacts Wider Corporate Goals and Plans:

BCG Matrix:

There are several tools organizations can use to assist them in the development of corporate goals and plans. Each of these are then affected by the strategies the organization adopts as a means of reducing payroll costs. The BCG Matrix is a popular tool for determining which of an organization's product portfolios should be given priority, by evaluating the growth potential of the product line vs. The market share the company controls. Product lines that have a high potential for growth, and the company controls a large market share are deemed 'stars' and should receive the resources needed to fully exploit the market segment. The question mark category also may warrant resource investment, as there is possible potential, despite the fact that the organization controls little market share.

These two categories, according to the matrix, should not be the target of reduced payroll. Instead, reductions should be taken first from the 'dog' category, where little market share is controlled and there is little room for growth. The cash cow category too can likely withstand reductions, as this is typically a well-established product line, with little room for growth. In this way, the organization can meet their goals of increasing profitability and revenues, while still reducing payroll costs.

Prahalad & Hamel's Core Competencies:

According to Prahalad and Hamel, there are certain core competencies that are critical to an organization's product lines. It is these core competencies that affect the organization's competitive advantage within the industry and also enable them to introduce new products or services. Core competencies, thus, lead to core product development. Core products are not products that are sold to customers, but instead are components that are used in the production of multiple end-user products. Each business unit utilizes these core products to develop their products for customers, through the use of these core product technologies.

These core competencies used to develop core products binds together the disparate business units within an organization. To identify core competencies, there are three tests:

1. Does it provide access to a wide variety of markets, and

2. Does it contribute significantly to end-product benefits, and

3. Will it be difficult for competitors to imitate

When cutting payroll costs, organizations need to be wary that these strategies can destroy the ability to build core competencies. If organizations are not mindful of this, it can result in lost competitiveness and revenues down the road, as a result of reduced payroll costs, which would be the antithesis of the organization's goals and plans ("Core competencies," 2010).

Porter's Generic Competitive Strategies:

Lastly, another possible strategic tools organizations utilize is Porter's Generic Competitive Strategies. Porter's theory surmises that even if an organization is an industry with below-average profitability, if the organization is positioned correctly, it can generate substantial returns. An organization's position is one of its greatest strengths. These strengths are segregated into two categories -- cost advantage and product differentiation. The scope of these results in three generic strategies for organizations: cost leadership, differentiation and focus. Each of these generic strategies are then applied at the business unit level.