Target Costs, Not People: A Best Practice for Your DEI Strategy During a Recession
Updated: May 7
If an organization views people as its greatest asset, then targeting its labor budget during a recession could be an anticlimactic action. While labor is potentially a substantial cost (or perhaps the most significant cost) in doing business, a strategic approach rather than a tactical approach should be utilized when looking for ways to reduce costs during a recession. That means, organizations, guided by their HR leaders, should assess three (3) key contributors impacting labor costs: productivity, performance and profitability, in that order. In so doing, organizations can potentially mitigate adverse reactions and responses to a fixed percentage reduction in labor costs, i.e., 20% across the board (a tactical or transactional action). To achieve this approach, HR, acting as a strategic partner, should collaborate with Finance to analyze labor data and assess rational ways to reduce costs. For productivity purposes, hours worked along with an overtime analysis should be conducted to assess productivity rates among employees. In addition, an employee classification analysis (salaried or hourly, employees or non-employees, etc.) can be used as a cost-saving measure by determining if non-union employees are truly overtime-eligible under relevant labor regulations (other considerations may apply for union-related overtime). In addition, productivity trends among teams should be gauged to assess areas of improvement for employee morale and engagement. Low morale and engagement could also be adversely impacting costs through low performance; therefore, performance management processes should be reviewed as a tool for reducing costs as a matter of policy. Conversely, underutilization of potentially high-performing employees should be analyzed to improve productivity and avert compounded cost pressures from turnover. Thus, performance data offers an opportunity to assess the positives and negatives of labor productivity. On the positive side of the performance management analysis, performance data can reveal where and how to target the highest and best use of labor, thereby increasing productivity of an organization’s “A-team”. Furthermore, a pulse survey can help identify where and how to target improved morale and engagement. Of course, productivity and performance are also direct contributors to profitability, positive and negative. Profitability, however, can be influenced by a plethora of top and bottom-line factors.
For purposes of the top-line, one of the key focal points for analyzing profitability goes back to productivity; in gist, a key consideration is whether sales people are hitting their sales and revenue targets – in other words, are they earning their keep? Whereas, the bottom-line opens up a lot more considerations from a profitability perspective. One of the more important considerations for today’s economy is ensuring that salary budgets are in line with the market; given that inflation started to cool in Q4 of 2022, there could be an opportunity to adjust salary budgets to be in line with the slight decrease in inflation. This could, however, be a slippery slope because money might be the motivating factor to accept or reject an offer. Meaningful work and a positive workplace experience could be a compensating factor for lower salaries, so think about making investments to foster an inclusive and belonging workplace.
Metrics related to inclusion and belonging can also be used to track productivity. There’s a direct correlation between performance and productivity. Regardless, a salary adjustment decision should not be made in isolation; in addition to understanding the correlation between performance and productivity, any salary adjustments should also include an equity impact analysis to manage risks related to pay disparities. Together, HR and Finance can determine the root cause of low productivity and analyze equity risks with a data-driven analysis to rationally and effectively target cost reductions. Targeting costs based on certain metrics such as productivity, performance and profitability establishes a data-driven rationale for labor cost reductions. And understandably, the root cause analysis of cost pressure as a strategic exercise for managing through a recession is a lot more work than a transactional (or tactical) exercise where a fixed percentage reduction in labor costs is utilized across the board. Nevertheless, the strategic approach affords organizations the very valuable benefits of risk management and risk mitigation. For example, in addition to the pay equity analysis, the productivity analysis should include a review of hours worked to determine if hours are lower due to some legally protected standards, i.e., short- or long-term disability, FMLA, pregnancy, etc. On the flip side, overtime hours should be reviewed to determine if there’s a justifiable reason for higher overtime. Similarly, when making salary adjustment or separation decisions, DEI data should be analyzed to avoid potential impacts to protected classes of employees, i.e., a pay equity analysis would address DEI. A comprehensive DEI analysis would rely on much of the same HR and payroll data to assess disparate impacts with layoffs or other separation decisions. By reviewing HR and other labor data from a DEI lens, it further safeguards profitability from the backlash of unintentional, bad decision-making, i.e., reputational and brand damage or lawsuits. Leading with data is always a best bet because decisions can then be based on targeted and fact-based insights. With data-driven decision-making, solving for and targeting a specific problem is clear rather than starting with a solution before the problem is defined (or failing to define the problem at all). In other words, a rational basis is established for the action or actions taken. With informed, data-driven decision making, the data creates a story and with that story there’s an opportunity to better understand risks associated with actions. Hence, a data-driven solution to problem solving mitigates risks and positions the decision-maker(s) for long-term success. In the context of a recession, by targeting costs v. people, business decisions not only achieve efficiency with cost reduction but there’s strategic effectiveness at play as well. And because doing business starts and ends with an organization’s greatest assets – it’s people – being effective at managing people, whether under strong economic conditions or in a recession, is critical to the overall success of the business operations. At TULIP, we call this commercial excellence.