4Hoteliers
SEARCH
SHARE THIS PAGE
NEWSLETTERS
CONTACT US
SUBMIT CONTENT
ADVERTISING
Cost Cutting - Alternatives to Redundancy.
By Christian Anklin
Monday, 9th February 2009
 
At a time when many hospitality companies are facing difficult decisions in regards to reducing their personnel costs, HVS Executive Search looks at the various options available and gets some expert advice.

As 2008 drew to an end, you may have found it difficult to get into the holiday spirit as the usual proceedings were overshadowed by a constant trickle of disturbing news. It seemed like every day another hospitality company announced that it had initiated redundancy consultations, cut bonuses, or offered unpaid leave to some of its staff.

Understandably, it was some of the publicly listed companies that were the first to announce cuts. Severe drops in their stock price and greater public scrutiny of their budgets and business plans forced them to make bolder and more visible moves in cost reduction. Also, just as the credit crunch originated in the United States and then moved eastward, the announcements of cost cutting seemed to be following a similar trail.

As the hotel industry is very labour intensive, it comes as no surprise that much of this cost cutting effort has been focused on payroll and other employee associated costs.

According to Dale Wielgus, the former SVP of Human Resources for Sofitel Worldwide, "Eliminating jobs is usually one of the easiest and most traditional targets. However, there are other opportunities that must be explored. My personal feeling is that you have to put a number next to each [option] and measure the financial impact."

There are many different ways to reduce labour costs. Listed in order of increasing severity, these include:
  • Hiring freeze
  • Cut in employee perks
  • Reduction of bonuses
  • Paying out a greater percentage of bonuses in company stock
  • Cut in base salaries
  • Unpaid Leave
  • Redundancies
Hiring Freeze

The hiring freeze is usually the precursor to any further steps in ‘cost reduction'. The cessation of all hiring activity is called in from the top and applies to the entire organization. Over the last months we saw many of the large international hotel management companies enforce a hiring freeze. While these are usually absolute, some companies make exceptions for certain divisions and some managers try to get around the freeze in extraordinary circumstances.

Dale Wielgus says, "Anticipation is the key. At the first sight of downturn, the rule applies to all and stick to it. Tell people to weather out the storm. It is easier to say ‘no' now to hiring than giving in and then terminating someone four months after they have been hired. This is a very common mistake."

In the past months, a few executives have voiced to us the contrary but compelling view that the current crisis is actually an ideal time to add talented people to their staff. We are inclined to agree that the talent pool of immediately available and highly skilled executives has seldom been so large. Unfortunately, it seems that only those with a very sound financial standing have the luxury of taking such a long-term view.

Cut in Employee Perks

This is one of the least visible cuts which is seldom announced both firm wide and in the press. One of the most common steps is to reduce the level of luxury in transport and accommodation, e.g. imposing economy flights instead of business class and four star hotels instead of five.

Reduction of Bonuses

It is fair to say that most employees expected a reduction in bonus pay last year, even if the overall results were good. Some companies opted to cut bonuses altogether.

John Guthrie, previously in charge of Learning and Management Development at Hilton International and now an independent HR adviser within the sector, said, "Bonuses and other elements of incentive based pay have to be used well. Bonus % opportunities should be kept, and in some instances, like sales, possibly increased but on the basis that payment is judged against much more demanding hurdles."

Dale Wielgus cautions that "A company must be disciplined in administering these programs. It is harder to take away in tough financial times, especially when companies may have given rewards even though the financial results were missed (" Mike's team worked really hard on that project, we can't reduce their bonus!"). You must put language in to these programs [so] that employees can understand: if the shareholders don't get results, you will not get all of your bonus. You must also have a culture that supports this."

Paying Out a Greater Percentage of Bonuses in Company Stock

This measure is likely to apply only to the upper echelon of executives in a company, who receive a substantial portion of their bonus in shares or share options. The allocation of more shares obviously saves the company cash in the short to medium term while also acting as an incentive to turn around the situation in order to reap the rewards of a large share price increase at a later stage.

Cut in Base Salaries

The Global Wage Report 2008/09 by the International Labour Organization (ILO) predicts that "Global growth in wages will be just 1.1% in 2009, down from 1.7% in 2008. Overall pay growth in industrialised countries is also expected to contract, from 0.8% in 2008 to -0.5% in 2009."1

While some companies are considering only inflationary increases in base salaries, others are increasing base salaries below the inflation rate, which is an effective decrease or cut in salaries. Our Moscow office reports that some hotel executives are taking (voluntary) cuts in base salaries of up to 30%-40% in order to retain their position with their current companies.

According to Tatiana Veller, our Managing Director of HVS Executive Search in Moscow:

"In Russia, various companies are reacting differently to the recent […] economic issues.

Some are cutting staff. Those are mainly the companies which had their staffs overinflated (e.g., those that were staffing for future growth). In Hotel operations, this is not yet so wide-spread, although by the signs on the market, may become more so in the near future.

Some are optimizing their payrolls, e.g. taking out additional perks (large coverage on medical insurance, vision/dental plans, corporate cars with drivers, paying executives' kids schooling, etc.), trying to become lean and live through this with tightened belt in order not to lose anybody.

Some are shaving the salaries of their top executives' [pay] (the bulk of the company's payroll spending) – in some cases, up to 30-40%. Executives, for most part, grumble but comply – the choice is either pay cut, or out.

Some just freeze their hiring and go into a cocoon mode, reportedly until Spring 2009.

I have only heard from one or two progressive companies (not the hotel properties, though) that they are looking to hire, given this is a great time economically and mentally to do this – employees will be less demanding and more committed for a while!"

Unpaid Leave

During the SARS crisis in Asia, many hotels asked their staff to take up to five days of unpaid leave per month, in order to save costs during the downturn without having to lay anyone off. This is a measure more often seen in the airline industry.

In October of last year, Ryanair announced that four hundred pilots and cabin crew would be forced to take a week of unpaid leave. In November, Cathay Pacific announced that it would offer unpaid leave to its employees, mostly due to increased costs incurred from hedging fuel costs. While there has not been much mention of unpaid leave for hotel staff in the press yet, Melco Crown Entertainment Ltd. announced that it would be offering unpaid leave or sabbaticals to some of its staff at the Crown Macau hotel in an effort to "deal with current economic conditions while simultaneously providing some job security".

Unpaid leave is more likely to be utilized in situations where the downturn is assumed to be of limited duration and the company is unwilling to shed staff on a permanent basis.

Redundancies

We have seen a steady increase of companies beginning or completing redundancy consultations. This is a clear sign that these companies foresee or are already experiencing a massive and prolonged downturn, where a severe reduction in business volume forces them to make permanent cuts in their number of staff.

John Guthrie says, "If you settle on a redundancy program, then you have to take three things into account (apart from national law and collective agreements etc.):


  • Making sure you have the right people to cope with a downturn. It's a good idea to have people who've been through a hospitality downturn before and have an almost instinctive ability to get the price/volume mix at its best;
  • Making sure you have the right talent to grow and develop the organization when you come out of the downturn. Selection for redundancy must, to the greatest extent possible, be done on a clear view of present and future potential
  • Spending as little cash as possible on redundancy payments."
Dale Wielgus continues, "Redundancies are often mismanaged in companies. I have seen departments reduce their headcount by three people and not achieve the savings needed to make an impact. Eliminating three mid to junior level positions is sometimes not as cost effective as eliminating the department head (VP level). It is not just about salary, it is about all those additional costs associated with a VP / SVP that are really costly (larger bonus, perks, travel, etc). Companies often do not take a serious look at cutting out the 150k VP but feel good about cutting out mid-managers at 50k."

One variation of straightforward redundancies is the combination of positions. For instance a company may decide to merge the VP of Sales with the VP of Marketing into the VP of Sales and Marketing, thus eliminating one position. The prerequisite of course is that the person who remains has the skills and time to handle both functions.

John Guthrie comments, "A redundancy program has two disadvantages - you lose human talent and it costs money. If you close down an activity and have no intention of restarting it when the upturn comes, be honest with yourself: it was an inherent waste of money from the outset and you're deluding yourself that you are managing your way out of a crisis. The truth is that you've been consistently wasteful. So, whilst you have to reduce cost, it might be more cash efficient not to pay a lot in termination costs (this will be especially true in most of continental Europe). In environments like these, you have to wait months and months before you get a saving."

It is heartening to note that some companies have taken the lessons from past troubles to heart, leaving them better equipped to face today's challenges. Beathe-Jeanette Lunde, Senior Vice President People Development & Radisson SAS Franchise Operations at The Rezidor Hotel Group, said:

"We are only 100 people working in the Corporate Office in Brussels. Our strategy has been very clear for many years to always have a very lean top organization and decentralize as much as we can. We learnt this especially during a cost cutting exercise we did back in 1993 when we saved the company from going bankrupt due to a purchase by our then owner Scandinavian Airlines of 40% of the shares in InterContinental Hotels. The share value dropped so much that we were in financial difficulties. Through task force group work across the company on all levels, we managed to find ways to cut costs, develop job combinations and flatten the organization in such a way that we survived. The learning from this Project "WIN" as we called it, has taught us several lessons we are also using today. We have no plans to make anyone in the Corporate Office in Brussels redundant as some of our competitors have already done."

Nobody can say for certain how long these challenging times will last but it is certain that more hospitality companies will be facing difficult personnel decisions in the months to come. We remain hopeful that the people entrusted with making these decisions are aware of all the options at their disposal, and that they weigh the financial as well as the personal impacts carefully.

1 www.personnel.com

www.hvs.com
Global Brand Awareness & Marketing Tools at 4Hoteliers.com ...[Click for More]
 Latest News  (Click title to read article)




 Latest Articles  (Click title to read)




 Most Read Articles  (Click title to read)




~ Important Notice ~
Articles appearing on 4Hoteliers contain copyright material. They are meant for your personal use and may not be reproduced or redistributed. While 4Hoteliers makes every effort to ensure accuracy, we can not be held responsible for the content nor the views expressed, which may not necessarily be those of either the original author or 4Hoteliers or its agents.
© Copyright 4Hoteliers 2001-2024 ~ unless stated otherwise, all rights reserved.
You can read more about 4Hoteliers and our company here
Use of this web site is subject to our
terms & conditions of service and privacy policy