This economy has hit our firm squarely between the eyes, and we are reeling. Before our bottom dropped out about 10 months ago, we were just over 200 employees and coming off several years of steady growth. We have cut all non-payroll expenditures back to the bone. About seven months ago we made a couple of rounds of layoffs, reducing our headcount to around 160. Since then, through a combination of across-the-board salary reductions and rolling furloughs, we have achieved a 20-percent payroll cost reduction, which has allowed us to preserve our remaining employees and hover around our monthly breakeven point.
Although some of our clients are starting to talk about a recovery, I’m still not able to see an end to this for us, and we continue to tread water. I’m having some second thoughts on our strategy of reducing pay across the board to save jobs as an alternative to more layoffs. What’s your opinion.
To paraphrase Thomas Paine at a particularly bleak period in the early days of our republic, these are indeed the times that try men’s souls. In my 30 years around engineers and architects, I have never seen a business recession cycle as deep, broad, and long lasting. And, while there are some signs of hope, there are still many issues working against a robust economic recovery anytime soon.
A 20-percent across-the-board pay cut is at best a short-term tactic to be employed as a temporary bridge back to certain full salary within one to two months at most. At seven months and counting, your methods are doing too much damage to too many of your staff. Not only is it hurting everyone financially, it may incite more than a few of them, especially those key individuals who are the most marketable, to consider seriously if they will remain with your firm once the crisis abates and opportunities at other firms begin to open up.
As president and CEO, resist the temptation to indulge your personal emotions and never forget that your primary constituency is the overall health and welfare of the firm. In doing what’s right for the firm, you will by definition be doing what is in the best long-term interest of the staff and clients. Real leadership requires real courage — the courage to take necessary actions in a timely fashion no matter how unpleasant and dreadful they may be.
I suggest that you plan and then make one more major round of layoffs — deep enough to ensure that, given your backlog of work and realistic prospects for new work, you will be able to put the remaining staff back to full salary and need them to work some overtime to meet deadlines. Assume that the current level of business is the new reality going forward and adjust to a viable size accordingly.
Given the magnitude of this cut, you must be willing to cut vertically at all experience and pay levels — from the top to the bottom. Consider this a major, long-term reshaping of the firm. Test your plan by keeping an eye on the average raw hourly payroll cost of staff before and after the intended staff reductions. Try to keep the average hourly raw payroll cost no higher after the reductions than before to enable you to be profitable going forward. If your planned reductions cause your average hourly rate to increase, you have cut too many lower-paid individuals and not enough of the more highly paid. By all means, work against your own hourly pay rate average, but for reference, according to industry surveys, the median average hourly raw payroll cost per direct labor hour for A/E firms is approximately $30.
Don’t avoid staff reductions by rationalizing, “If we release good people now, we won’t have them to do the work when the economy turns around.” First, no one knows when the upturn will occur, and you can’t wait forever to repair the firm or you might not be around when the rebound does occur. Second, there are a lot of good people on the street already — with more to come. Third, if you manage through the crisis well, and turn around your firm more quickly than others, you’ll have the pick of the crop when it comes time to rehire. Fourth, the core staff you do retain and get back to full-time status will likely be immensely grateful (without admitting so outwardly) that you took the actions you did.
Above all, hang in there. To end as I began with perspective from Thomas Paine: “By perseverance and fortitude we have the prospect of a glorious issue; by cowardice and submission, the sad choice of a variety of evils.”
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