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Hiring and Firing

People Cost

The cost of people is the most difficult cost to manage. Because it is so tricky it is usually left until last in any cost-cutting program and any discussion of cost management.

Why is people cost so problematic?

First, people cost is very sticky. Once people are on the payroll it’s hard to get them off, even if they are poor performers. There’s a natural momentum the other way: to give them raises and promotions, to provide extra staff under them to help out. Cutting staff can be slow or impossible as well as very expensive. A company, or an individual manager, can be sued for discrimination or unfair process if things go wrong. And even if a business is collapsing it is rare for staff to accept any cuts in pay.

Secondly, people form the main area of cost that goes up relentlessly in real terms. Wages in Europe and North America increase over the long run at 1-2% a year faster than inflation. This is productivity growth, good for the economy and good for personal wealth. But it is an ongoing cost challenge for any people business.

Thirdly, real people cost is a lot larger than it seems. People create indirect costs other than payroll, like facilities, equipment, and travel. Adding headcount in production or sales means more overhead staff in HR and accounting.


Why are you hiring? Do you really need an extra person? If you nip unnecessary hiring in the bud, you’ll save yourself a lot of pain later.

Are you hiring another person to do an existing job because workload has grown? Find ways to get more productive with the staff you have. Stay with that approach for a long time before you give up on it.

A good trick for getting a grip on headcount growth is to treat all hiring decisions as capital investments. Capitalize their likely future cost, then evaluate the hiring decision just like you would a major investment in a production line or a multimillion-dollar IT project.

If someone is hired on a $50,000 salary, by the time you realize it’s a bad hire and then start the exit process it can very well take 2 years or more full circle. Not only are you out $100,000 in salary but also all of the indirect costs, management training time, team morale, and the opportunity cost with it.

When you do hire, try to use more short-term contracts and part-time staff before bringing anyone on full-time. There are obvious benefits for employers: fewer employment liabilities, a more variable cost structure, lower indirect costs.

And there are benefits for employees too. Being able to work part-time with flexible hours opens up job options to mothers and retirees. Working short-term contracts suits mobile professionals like programmers or designers. The internet and declining telecom costs make it possible to do many jobs from remote or home locations. These are win-win for employers and staff alike.


Why are you hiring? Do you really need an extra person? If you nip unnecessary hiring in the bud, you’ll save yourself a lot of pain later.

Are you hiring another person to do an existing job because workload has grown? Find ways to get more productive with the staff you have. Stay with that approach for a long time before you give up on it.

Or are you hiring a new person for a new job? Make sure you have a real justification for that new activity, a proper investment case.

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