Is Temporary Salary Reduction a Fair Move for New Service Industry Setups Facing Losses?

Hi team, now, since in most organizations, a major discussion is focused on cost reduction, I would like to request expert comments/views on cost-cutting measures in the service industry where margins are extremely thin. Sometimes, branches are closed just to halt financial losses. In such a scenario, if a significant portion of the costs is attributed to salaries, would it be appropriate to consider a temporary reduction in salaries until the organization reaches the breakeven point, especially for a new setup? Kindly provide your insights.

Regards,
Chhaya

Cost Control Measures for New Setups

This is a very crucial posting that relates directly to individual employees. It must be handled very carefully, especially for a new setup. There are many ways to have more effective cost control. For example:

• Implementing work from home - a compulsory measure for 14 days (depending on the cost) where the employee may receive 20% less pay than usual.

• Reducing other benefits provided to employees.

Any proposal for cost reduction that directly impacts employees must be accompanied by compensatory benefits in the future. This approach will enhance the employees' morale and ensure that their output is not adversely affected.

Regards,
JSR

Salary Reduction as a Cost-Cutting Measure

Cutting down salaries is a possibility in the current scenario. It's easier if you already have a fixed, variable salary structure. Then you just reduce the variable wages.

If it's a fully fixed salary, then you need to call and speak to each of the employees (or with the union if there is one) and explain the economic scenario. Explain to them that there are two options: we fire a certain number of employees, shut down one of the factories, offices, or branches, or everyone takes a salary cut (maybe temporarily).

If the employees are rational, they will agree. The example of what happened with TV18 should be enough of an indicator (450 employees terminated in a week due to profitability and cash flow issues).

However, you need to ensure that the salary cuts are uniform across the board. It should not be that some who agreed got cut and those who refused get full salary. Also, cuts should be implemented for the top management.

Furthermore, a better way is to look at all perks, benefits, and expenses that can be cut down without affecting productivity. In most cases, that can make a better contribution to profitability than the basic salary reduction.

Also, ensure that the reduction does not result in the salary going below the minimum wage level.

The Art of Cost Cutting in Organizations

The art of cost cutting or cost reduction is, in itself, an onerous task. The success of this endeavor lies in averting murmurs from any quarter. This means that one has to carefully identify which areas to touch and which ones shouldn't be. Undoubtedly, a downsized purse definitely pinches those concerned, as most of them have their own commitments. Therefore, success will be assured when a few wasteful expenditures are identified, and simultaneously, a feasible quantum from such attempts is also an important factor.

If there are none, the second option could be to increase revenue from profit centers where the corresponding costs could be minimal, or the variable costs are less while the fixed costs remain almost at the same level. Although the marginal costing methodology may not directly apply to some service industries, ways should be found to increase volume and profitability. Optimum utilization of manpower, avoiding wastage, and eliminating idling are a few other options. However, for new ventures, success may not be immediate as they are like infants, and infanticide is a crime attributed towards decision-makers.