Labour is very important in enhancing business operations but its cost should always be manageable to avoid hurting profitability. The cost of labour is incurred on a monthly basis and it can skyrocket due to a bloated workforce or due to paying high salaries.
Big companies in Kenya such as Kenya Commercial Bank, Cooperative Bank, National Bank, Barclays and Equity Bank have been victims of a high wage bill. This is because they engaged in aggressive recruitment of managers in a bid to safeguard market share following the entry of mobile money in 2007.
The cost of remunerating these managers was excessively high as they had been poached from other firms. Subsequently, all of these companies contracted McKinsey to restructure their human resources which had become unmanageable.
The first recommendation in a restructuring campaign by McKinsey has always been headcount reductions which it says is the first step towards improving the balance sheet performance. But before taking this step, firms are advised to study the activities that are essential for distinctive production that would be easily damaged by cutting jobs.
In the small and medium enterprises category, McKinsey assisted in the restructuring of the human resource in the acquisition of Real Insurance by Britam. The impact of a huge wage bill is much bigger on SMEs because they have a much lower turnover.
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SMEs should avoid the trap of a huge recurrent expenditure in salaries and wages by setting appropriate pay packages for prospective employees at the outset. Exiting low-profit businesses early enough also helps to reduce wage bill losses and to improve competitiveness.
SMEs which are considering starting hiring should fully understand their financial situation and the scope of potential outcomes due to external market factors. This is “intelligent cost cutting”, according to McKinsey, as it involves recruiting only the needed staff who can handle the current and future needs of the business.
One more thing to note is that setting salary levels is a key decision because pay affects staff performance.
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