How to Cut Payroll Costs Without Layoffs

Ask any entrepreneur about his worst business experiences, and laying people off is sure to top the list. After all, people who work together in an intimate setting often form personal connections that mirror family bonds. Craig Lindell, chief executive of 17-person wastewater treatment company Aquapoint, remembers having to lay off staff in the mid-'80s, when he was chief operating officer of a fashion accessories company. "I faced those people when they lost their jobs," says Lindell, who still gets choked up talking about it. Reka Mostella, area manager of the Small Business Development Center at the University of South Carolina Aiken, sympathizes. "Business management is not about running a company under ideal circumstances," she says. "It's knowing what to change when things change."

Aside from the personal toll, 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.

But salaries and wages typically account for 60% to 80% of a small company's expenses, according to Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville. And with nearly 70% of small businesses suffering sales declines, their owners are doing "things that they hoped they would not have to do," says Alice Bredin, an adviser to American Express Open, AmEx' small business division. That often includes tightening payroll. In a survey fielded by Open late in January, one-quarter of small business owners said they were cutting staff hours or jobs, and 9 out of 10 said they were curtailing hiring plans. It adds up. In January, small businesses with fewer than 50 workers shed 175,000 jobs, according to payroll firm ADP.

Yet many entrepreneurs are trimming payroll costs without laying off hard-to-replace employees. Some, including Jim Strite, CEO of Strite Design & Remodeling, are working with staff to devise ways to save jobs and minimize the blow to workplace culture if cuts are unavoidable. Naturally, the first line of defense has been to shrink nonessential expenses such as travel and business meals, make do in smaller quarters, and postpone or cancel big-ticket investments. But some business owners are preserving jobs by reducing hours, encouraging employees to take unpaid leaves, and chopping pay (often their own).

If you're feeling the squeeze, it may be possible to squeak by without losing your company's best assets. Following are three strategies to help keep your prized employees on board.

TALK STRAIGHT, GET EMPLOYEES INVOLVED

Jim Strite, Strite Design & Remodeling

On Thursday, Mar. 20, 2008, Jim Strite gathered his staff around the oval table in his "education room," where charts illustrating the company's progress adorn the walls. The owner of Strite Design & Remodeling in Boise, and a former economics lecturer, Strite showed his 14 employees how the housing meltdown was affecting the company: Revenue was a third below target. Gross profit, off 40%, wasn't enough to cover overhead, putting the firm in the red. Quick improvement was unlikely. Spring usually yielded projects that lasted through the summer, but calls about kitchen remodels, bathroom makeovers, and dream additions weren't coming in nearly often enough, despite a stepped-up marketing effort.

Strite's employees were accustomed to straight talk, although they were surprised at the urgency of Strite's message. The firm is an "open-book" company, where employees see finances regularly, are schooled in the business, and are expected to drive its success. "Communication is important at all times. In tough times, it just becomes all that more important," says Rich Armstrong, president of Great Game of Business, a Springfield (Mo.) consulting company that promotes open-book principles. Armstrong says that candid dialogue eliminates distracting rumors and fears and fosters teamwork.

In Strite's case, staffers immediately volunteered cost-cutting ideas, including offers to cut their own hours and take unpaid vacation.

Cooper has his bullpen’s back

Cutting Work Hours Without Cutting Staff

Shifting into Cost-Cutting Mode