What proportion of your company's budget is spent on payroll? Reducing your labour costs will help you keep these costs in check and gain certain benefits for your business.
Read on to see how this works and what you can do to bring those costs down.
Definition of reduced labour costs
Labour costs can be defined as the total a company invests for every employee they hire. Or rather, how much each employee costs the organisation. Your calculations should include gross salary, social security contributions, overtime payments, and redundancy pay.
According to Eurostat, the average labour cost across EU-27 countries in 2019 was €27.70/hour. However, this ranges from as little as €6.00/hour in Bulgaria to a peak of €44.70/hour in Denmark.
But don't confuse salary costs with labour costs, as they're not the same thing. Salary costs are part of labour costs but only considers the gross salary a company pays its employees for the service they provide. In other words: base salary, supplements, overtime and extra payments.
Benefits of reducing labour costs
There are several advantages to be gained by analysing labour costs and minimising their effect on the company's budget.
The main benefit of reducing labour costs is clearly the savings it represents for the company. The ideal ratio would be to invest between 15–30% of gross profit in remuneration salaries. If your company's salary expenses are higher than that, then you should introduce specific techniques to help you reduce these costs.
Reducing costs means higher profits. A profitable company is a healthy one, meaning the future is bright, at least in the short term.
Some sectors have naturally lower profits such as the car industry with around 2%, or construction at about 5%. Sectors like these have to fight to reduce their costs to improve their positioning.
Companies that reduce their costs and earn more profit invest more in themselves and have more growth potential as a result. Reinvesting profits into the company is one of the keys to prosperity.
8 ways to reduce labour costs
How can you reduce your company's labour costs? There are many ways of doing it, but here are eight options that will have a direct impact on your company's budget.
1. Review your compensation plan
Wages and salaries tend to follow an upwards trend in any organisation, irrespective of the market or financial situation. And this is why it's essential to carry out regular revisions to make sure that the company's payroll is accompanying current trends. If they are above average, then you could freeze them for a while and offer symbolic increases.
If you opt for the latter, then it's vital to be transparent with the employees concerned by explaining your reasons, the actions that need to be taken and for how long.
Read about how to create an employee compensation plan in our lastest article.
2. Reduce staff turnover
A high churn rate costs the company money: the salaries of those who take part in the recruitment process, hours of training and adaptation for new hires, etc. And this also implies a series of indirect costs: longer production cycles or wasted raw materials, for example.
So, it's better to retain your workforce for as long as possible.
3. Offer a reduced working day
Some companies reduce their costs by negotiating adjustments to working hours with their employees. For example, offer them the option of working four 10-hour days instead of five eight-hour days, in exchange for a small reduction in salary. This could be an attractive alternative for employees with family and who may welcome the extra free time.
4. Make part of employees' fixed salaries variable
Negotiate with your employees and propose that some of their salaries become variable, according to their own objectives and those of the organisation. So, the more money the company makes, the more employees will earn.
This model is growing in popularity. But remember that employees salaries can be no lower than the UK National Minimum Wage, and similar rules will apply in other countries. In Spain, for example, no more than 30% of employees' salaries can be variable. At least some of salespeople and marketing professionals' salaries are variable depending on their results, as their work is directly related to the company's sales.
5. Hire part-time employees
Hiring part-time employees is an interesting way to reduce labour costs because they receive lower salaries. But apart from that, they don't usually opt for benefits, bonuses or other forms of compensation the company offers.
An increasing number of companies now have a pool of temporary staff that they can call in when needed or for a limited period. It's a transparent system that is based on demand.
We have to remember that labour costs are the largest item on any company budget, so it's vital to find ways to optimise this as much as possible.
6. Work with freelancers
Another option is to hire freelancers to work on specific projects or to support the company on an ad hoc basis. While their hourly rate will be higher than that of permanent employees, you won't have to cover regular social security payments or training costs. So, it's usually a more economical alternative.
7. Automatise tasks
With the right technology, you can automate tasks, optimise processes and at a reasonable cost. How can this help you reduce labour costs? For example, it can help you increase production without hiring extra staff.
You need to select the right tools to do this, and then follow through with a complete implementation and training process. This is the only way to get the most out of technology, and the results will prove it.
8. Avoid redundancies between departments
As companies grow, it's natural that the number of departments grows with it. Clusters of teams emerge and often with a lack of communication between them, which can sometimes result in duplicate work, and processes become inefficient.
Carrying out periodic reviews, analysing processes, workflows, and communication is fundamental to avoid redundancy between departments and to ensure that each employee's responsibilities are clear.