Productivity and not Always Retrenchment

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It is not unusual for business firms to respond to viability challenges by trimming off employees, even when the affected employees are the highest contributing factor in terms of productivity.  For most organisations, cost containment measures first affect the employees especially the lower level employees through retrenchment. At times, the remuneration for a single manager will be equivalent to that of about ten shop floor employees who are prone to be shown the exit door at the slightest signal of a slump in profits. Sounds familiar right? This paradox then leads one to ask: “Is retrenchment always a good idea for cost containment?”

Whilst retrenchment as a cost containment measure is a noble idea, experience has shown that it often leads to a decline in organisational performance and product quality. A downward spiral trend in organisational performance is frequently precipitated when due diligence is not followed in effecting retrenchment. Excessive retrenchment leads to poor performance and/or product quality which in turn leads to further decline in profits and consequently more retrenchments until the business is shutdown, holding other things constant. Notwithstanding the dictates of the labour laws with regards to retrenchment which some stakeholders especially employers describe as rigid, retrenchment process is more often than not bound to bring some negative repercussion one way or the other to the retrenching organisation.

In contrast, allowing too many people within the organisation results in overburdening of the organisation’s financial coffers through excessive wage bill. It is therefore imperative for managers to strike a balance and to understand the optimum workforce required for smooth and sustainable operations at each level on the organogram as well as each employee’s contribution in dollar terms towards the profitability of the organisation. This can be assisted through the use of productivity consultants who are expert in the subject of productivity measurement.

It is crucial to note that productivity does not mean profitability though the two are interrelated. Profitability measures the current state of business whereas productivity has a long run bearing on the profitability and growth of the business. Therefore the company’s workforce might be very productive despite the losses which would be incurred in the current period. The origin of such losses might be a single factor or a combination of a number of factors both internal and external. In that regard, a root cause analysis might assist to pin point the actual cause for these losses and address it before resorting to retrenchment.

Assuming that the organisation’s wage bill is too bloated relative to its financial standing, one needs to understand how the remuneration system is distributed across various levels within the organisation. In some cases, the organisation will be top heavy such that retrenching all the shop employees will still not improve the organisation’s financial position. In such cases, a salary cut on the part of the management will be invaluable in that it results in a three-prong benefit: Firstly it improves the organisation’s financial position. Secondly it prevents disruptions which would likely occur in the case of a retrenchment and thirdly it saves jobs for many shop floor workers.

From an economics standpoint, the optimal number of employees can be reached when the marginal revenue product equals the wage rate (equi-marginal principle). This equi-marginal principle serves to highlight that as long as the additional contribution of the extra employee in terms of revenue surpasses the additional costs (in this case the wage) of that employee an organisation should continue hiring more employees. The optimum number of employees will be reached when the employee’s additional contribution is equal to the additional cost of hiring the employee. If the additional cost of an extra employee to the organisation surpasses the additional contribution the employee brings to the organisation, then retrenchment will be justified.

In line with the aforementioned dynamics to productivity and profitability, it is evident that retrenching people is not always the best solution in dealing with viability challenges. This is especially so when we do not have an insight to the employees’ actual monetary contributions on the profitability and overall productivity of the organisation. Further, there are a number of interventions which a business should embark on to try and boost its financial position before it settles for retrenchment including productivity tools such as kaizen and 5S. Organisations which follow the productivity improvement alternative often avert the negative effects that retrenchment brings to the organisations.