What every employer needs to know about staff costs

The
Zimbabwean economy has made a turn in the wrong direction once again, and most
employers and employees are now reliving the horrors of the 2008
hyperinflationary environment. The cost of living is going up on a daily basis,
while employees are struggling to make ends meet with current earnings. While
most employers have made an effort to increase employee earnings through
various means, the exchange rate fluctuations are fast eroding these
adjustments at an alarming rate posing compensation adjustment sustainability
concerns. The current environment has made managing staff costs a nightmare for
most businesses.

For
a long time Staff costs have been known to contribute significantly to
operational costs with most organisations, in my opinion, spending an average
of 49% of total operational costs and 40% of income on staff costs. As such
successful businesses will be those that are able to efficiently manage their
staff costs. Volatile business cycles mean that success of businesses in
Zimbabwe and abroad hinges on extremely flexible, proactive and responsive
staff costs control.

Managing
staff costs effectively and efficiently is a vital skill that requires
attention to numbers, sensitivity to the needs and morale of staff, being
decisive in complex scenarios, and a determination to monitor and react to an
ever-dynamic business environment.

In
broader terms, staff costs are those of employees on a full time or part-time employment
contract with an organisation. They are made up of gross wages, salaries,
commissions, and employer contributions to national social security and the
cost of all other fringe benefits.

Other
organisations separate staff costs into two classes namely direct staff costs
and indirect staff costs. Direct staff costs include wages for the employees
physically making a product, like workers on a car assembly line. These costs
can be directly traced to a finished product or service. On the other hand,
indirect costs are associated with support labour, an example being employees
that maintain factory equipment but don't operate the machinery themselves.

Direct
staff costs are more likely to vary with the volume of business while indirect
staff costs may remain fixed. Each business unit in a departmentalised
organisation may have the minimum number of staffing, this is considered fixed
staff costs whereas additional employees as required by a business as volume
varies are regarded as variable staff costs.

Line
managers have an absolute responsibility to control costs and among them staff
costs which are by far the largest in terms of expense amount. This means that
whatever outcome of their cost containment strategy good or bad, it is their
total responsibility.  Line managers need
to invest their effort where it yields the greatest return, they should focus
their efforts on controlling their staff costs efficiently.

In
the event that line managers had no other responsibilities, managing staff
costs could have been simple, but maintaining sufficient staffing levels to
properly serve shareholders’ interest is also a major requirement of their
jobs.

Staff
costs drivers refer to any factors that cause the change in the value of staff
costs. The cost drivers are the link between business activity and staff costs.
For instance, recruitment is a staff cost driver and the metric is headcount as
it influences total recruitment cost. Headcount, in turn, is influenced by the
business model depending on whether it is capital or labour intensive. The
concept can be demonstrated by capital intensive manufacturing industries that
have managed to invest in heavy machinery and robots while the banking industry
introduced ATMs, whereas service industries like hotels largely remain labour
intensive as their activities rely heavily on human intervention.

Business
cycles can see staff costs varying during a particular year as seasonal
fluctuations determine headcount. Work hours are another example of staff costs
drivers as they determine how much an employee will be paid in the form of
normal time or overtime remuneration. Leave liability is also another driver of
staff costs as there are incidents were organisations end up offering cash in
lieu of leave for employees that have accumulated many days and it will be
imperative that they remain at work.

The
location of the organisation plays a role in determining staff costs as
evidenced by the remuneration disparity between urban areas and rural areas
which is influenced by cost of living. Organisation‘s skills demand and
workforce supply in a particular location also determines staff costs. Several
organisations located in areas with less educated workforce have ended up
offering financial incentives for skilled employees to relocate to their areas
of business.

Task
difficulty determines the level of education and skills required to perform a
job implying that the more complex the job is the higher the staff costs and
vice versa. The efficiency of the business contributes to staff costs in
several ways. Poorly maintained equipment, unproductive meetings and shortages
of basic materials all increase labour costs. Inefficient scheduling that
results in overtime leads to high labour costs. Poor workflow planning, bad
building layout that results in more effort and time to complete a task is also
likely to increase staff costs.

In
light of the several issues highlighted above, managers are strongly urged to
perform workforce planning under the guidance of qualified consultants to
ensure that they maintain adequate staffing levels and are prepared to meet
future demands for more skills. Managing leave liability by scheduling
vacations on slow time to avoid replacing staff and watching out for misuse of
sick leave helps a lot in containing staff costs. Staff rationalisation should
always be the last resort after looking at all business factors, a lesson well
learnt by Albert Dunlap who sent most of Sunbeam plc. employees to the
unemployment line through an aggressive cost-cutting scheme and still failed to
turn around the company.

In
a broad and general way, this article discussed the challenges of efficiently
managing staff costs and suggested some strategies for doing this. As with any
complicated matter, there is no simple solution. It is through the constant application
of a number of these principles and strategies that a manager will achieve
success in managing staff costs.

David
Shambare, B.com Acc. MBA is a consultant at Industrial Psychology Consultants
(Pvt.) Ltd a management and human resources consulting firm.

Phone
+263 4 481946-48/481950/2900276/2900966 or cell number +263 773242225 or
email: david@ipcconsultants.com or visit our
website at www.ipcconsultants.com