Click here for the original Linkedin article.
The global economy is suffering through a particularly difficult time right now. The recent onslaught of sharply-changing tariffs, and uncertainty about the future of international trade and supply chains, has leaders turning to time-honored strategies for keeping costs down. And since labor costs often are the largest on a company’s balance sheet, cutting headcount, salaries and hourly compensation usually are at the top of the list.
But should they be? There are particular challenges that make this strategy more risky today compared to the past three plus decades.
Leaders are used to calling on their staff to make shared sacrifices when times get tough. They expect that the prospect of keeping their jobs or full compensation should be enough for the staff to do whatever it takes to get to the other side of the economic tough times. Yet recent labor market trends have demonstrated unequivocally that in today’s economic environment, that strategy is more risky today than it ever has been:
- Frontline employees in many jobs and industries are already at the breaking point in terms of their ability to absorb greater workloads, lower compensation, and uncertain shifts + scheduling
- Inflation in recent years has made their economic situations harder to manage
- Tariffs and rising trade barriers are only going to exacerbate the situation
The threat of losing their job, or having their compensation cut, is not enough to motivate most people to act how you want them to – especially when they are at their economic breaking point. They will do the minimum needed to keep their jobs, plus a bit more. But they definitely will not go above and beyond their job descriptions in response to those threats. Yet getting full employee engagement with the business objectives is precisely what most business models need for success. As a consequence, you should consider alternative strategies to pursue in conjunction with or preceding traditional labor cost reduction. Some options to consider are provided here.
What’s different about the economic environment today?
The economy and worker sentiment about their jobs and compensation are in a very different place today than most leaders realize. The changes started over ten years ago, well before the pandemic.
I first documented these changes in my 2022 Sloan Management Review article Getting Ahead of Rising Labor Costs. The essence: there was 30-plus years of constantly increasing productivity demands coupled with deteriorating high-paying job opportunities for most frontline workers in non-technical occupations. Those two trends combined created enough economic pressure to push many frontline workers to withdraw their willingness to meet the productivity demands – unless they were both sufficiently rewarded and not pushed past the breaking point to meet the targets.
Since that article three years ago, much more systematic data has emerged, showing the knock-on effects of those trends which, if anything, may have accelerated. What’s happening? In the past few years, the lowest wage workers – the ones with the worst job prospects and least power in the labor market – have seen their wages increase faster than all other groups of workers who are paid more. The only explanation for the faster gains for the lowest-wage workers is that organizations across the spectrum of industries and business models are finding the strategy of balancing the books on the backs of their lowest-paid workers has run its course; the details are in my recent articles series Strategic leadership is at a crossroads.
Adding to their pain, the continued high interest rates and rising prices following pandemic-induced inflation have made their lives harder, even as their wages have risen. A few years of faster-growing wages are not enough to make up for three decades of deterioration and falling behind everyone else in the labor market. Even though wages have started to make up some of the lost ground, on other fronts too much risk continues to be shifted from companies onto their shoulders, especially through inhumane scheduling demands.
As if that wasn’t enough, the shock treatment being applied to global trade flows by rapidly increasing and fluctuating tariffs in 2025 is further eroding both these workers’ purchasing power and job prospects. So at the same time that your business model feels the acute pain from the trade and tariff disruptions, this is precisely the wrong time to blindly jump into traditional ways of cutting compensation costs.
What to do instead of traditional compensation cuts?
Fortunately, there are options for addressing the increased cost pressures facing your business right now.
Most important is focusing on the ultimate objective: maximizing margins and sales in the short and longer runs. If cutting labor costs causes workers to hold back their effort, your customers’ willingness to pay, and top line revenue can easily deteriorate by more than the cost savings from lowering compensation.
Since your frontline workers are feeling continued economic pressures and too-high productivity demands, the key is finding solutions that can take the place of cutting compensation. And if you cannot avoid cutting compensation, look for ways to lessen the blow, so you might still get some of their dedication and discretionary effort.
Five examples to consider follow.
Simplify your processes. Getting rid of redundant work, and work that is not mission critical, is one of the easiest things to do. Over time, more and more priorities get added, usually without consideration for the overall workload. If your teams are juggling too many priorities, it can become impossible to get them all done. Ruthless prioritization of what’s really important, and putting everything else on the back burner can help free up lots of time and renew focus on what matters most.
Clean up management roles and layers. Simplifying processes usually frees up substantial managerial and leadership time for other things. Rather than redeploy all the time freed up, you can cut some of that headcount, which is much more expensive per capita than frontline roles. In addition, over time issues with spans of control (number of direct reports) can crop up, especially if people are promoted based on their job performance without regard for the total number of people needed for a particular managerial role or level. Cleaning all that up by reclassifying people, increasing their direct reports, etc. also frees up money by lowering managerial headcount.
Clean up the work. Every organization has work that has evolved over time, which was supposed to follow specific protocols. Yet staff and supervisors working on their own usually find ways to cut corners, do some bespoke work design, and more. They do these things both because it’s often easier than following the protocols, and because having local flexibility can be a virtue. Yet let things go on that way long enough, and substantial problems with the way the work is done usually crop up. So do a systematic review of how people and teams are working, compared to the protocols. Rededicating everyone to the established protocols often yields time and cost savings.
Address longstanding irritants. The old adage is that people don’t leave organizations, they leave their supervisor. This is both true and a guidepost for how to make their lives better, even if you have to reduce their compensation. Challenges include: poor communication; micromanagement; unrealistic demands to be in the office; not enough flexibility and forewarning on work schedules and project deadlines to better integrate their work demands with their personal lives; lack of access to developmental opportunities and career advancement; unsupportive teammates; and more. Improving these things usually doesn’t require additional money. It require greater attention and leadership expertise from their supervisors up through senior executives.
Provide incentives for gainsharing. Gainsharing is an old concept that should be an essential tool for your staff to find cost savings, including adopting AI. It is different than profit sharing, which is the basis for most year-end bonuses, and focused on operational objectives such as increased productivity, lower operating costs, and more. Gainsharing grew in importance decades ago when manufacturing was transformed from traditional top-down management to more team-based approaches to managing and improving performance. The principles behind gainsharing can – and should – be applied in many non-manufacturing business models; yet the vast majority of organizations opt only for year-end bonuses based on profitability, not the more process-oriented metrics for gainsharing. Which means there is ample room to experiment with the potential benefits of gainsharing for your employees – especially for encouraging them to try adopting AI in their work to increase productivity.
As attractive as all these options may sound, it’s imperative that you figure out the strategy that works best for your history, culture and business model. This means being purposeful about the strategic, financial and operational challenges facing your organization, choosing one or more options, and testing them out. Making the ultimate correct strategic decisions requires setting up measurement and sensing approaches so you can make data-based decisions about what works, what needs to be modified, and what to discard as your team navigates these turbulent times.