Corporate Executive Board

Finding New Reductions in Labor Costs


As the global economy continues to stabilize, many companies are ceasing to use staff reductions as a cost-saving mechanism. This allows companies to rely on a more stable workforce to better execute on corporate strategy and initiatives, and ultimately gain the competitive advantages that are available in the transitioning marketplace.

However, this does not mean that HR executives and other business leaders are off the hook in their responsibilities to continue to reduce total labor costs. Faced with the dilemma of reducing labor costs without negatively impacting employee engagement or productivity, business leaders must find creative ways to identify the next wave of labor costs reductions.

Rest easy. It sounds harder than it actually is.

Through its ongoing research and conversations with HR executives and business leaders from Fortune 500 Companies, CLC Genesee, The Corporate Executive Board's (CEB) HR consulting and workforce division identified three measures that progressive companies use to reduce costs while keeping employees satisfied with the Total Rewards Offer.

Companies managing changes in compensation and benefits spending by following the steps listed below report an ability to reduce labor costs in critical segments by at least 5%, while improving the value that employees receive from the Total Rewards Offer.

1. Measure employee values, not line-item labor costs.

Progressive organizations understand that Total Rewards costs rarely equal employee perceived value. Changing elements of the Total Rewards Offer without first measuring value is similar to throwing darts while blindfolded; you will have no idea how your decisions will impact the workforce. Leading HR executives have emulated market researchers by using preference surveys to identify the specific trade-offs that employees are willing to make when forced to decide between compensation and benefits plans.

2. Find the sweet spot by comparing employee value to actual cost.

There are usually two sweet spots in Total Rewards Plan Design. The first is the area in which an organization can increase employee perceived value of the Total Rewards Offer without incurring any additional costs. The second, and most typically targeted by decisions makers, is where employee perceived value remains constant or improves where total labor costs are reduced. Without creating a mechanism to compare value to cost in a consistent format, neither sweet spot can be accurately identified.

3. Predict changes before making tough decisions.

Associating the value that critical populations receive from each incremental change in the Total Rewards Offer allows executives to predict migration patterns if introducing new compensation and benefits plans to employees. These leading companies cannot only identify the base-line plans that will be most effective, but can also adjust individual line items—such as 401(k) match or paid vacation—to perfect the selected plan.

These three steps are instrumental in the plan design itself and also in providing the fact basis to build the business case and gain internal support before making Total Rewards changes. By following the steps detailed above, HR executives and business leaders will be able to reduce the total labor costs while increasing employee retention and discretionary effort.

What the Best Companies Do™

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CEB specializes in helping companies drive corporate performance by identifying and building on best practices. The organization offers data analysis, research, and advisory services relevant to business leadership. CEB's client and member network includes 85 percent of the Fortune 500, 50 percent of the Dow Jones Asian Titans, 70 percent of the FTSE 100, and 80 percent of the DAX-30. CEB membership encompasses 50 countries, 5,300 individual organizations, and 225,000 business professionals.

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