The simple key to managing labor costs

The key to managing labor costs is simple…well, not exactly.  It's actually quite difficult, and even messy, which is why many organizations neglect to focus on this one thing.  And it's not what you might think. It's not about shifting compensation from fixed to variable. Or about better controlling your health care cost trend. Those things are important and can be effective.  But the simple key to better managing labor costs is all about job design and leveling.

What exactly is job design and leveling?

Job design and leveling is the process by which organizations determine how work gets done and at what level and cost. Put simply, this is the process for establishing how a job is created in an organization, determining how such jobs are assigned to levels and how compensation is determined for the role. This process can be difficult to manage and govern.

This difficulty is pronounced in organizations that experience rapid growth and/or multiple transactions. It is most true in cases where the business has pushed the responsibility for job design, leveling and compensation decisions to HR business partners or talent acquisition teams without a rational structure or proper governance process in place.

In these cases it is typical to find a proliferation of the number of distinct job titles.  Most organizations shouldn’t have a percentage of unique jobs to total employees in excess of 30%.  However, many organizations find themselves in the situation where more than half of employees are assigned to a job that is unique to one person.

Should companies design jobs around people?

This scenario of designing jobs around people is often coupled with the over-leveling of such roles, again as the individual (not the job) is assigned to an organizational level.  It’s hard to focus on the role and not the person.  And certainly there are stars in an organization who don’t necessarily need to fit within a defined structure, but this should be a rare exception and certainly not exceed 5% of employees.

Inevitably this over-leveling and title inflation leads to the organization paying more than it should to get work done.  

Getting this right isn’t about paying employees less. It’s about better understanding how much the organization should be paying for work, building a rational hierarchy around roles and making thoughtful decisions within or sometimes outside of the job leveling structure.  

Ultimately a rational approach to job design and leveling will provide for a less complex organizational structure and more effective labor cost management.

Is there a way to get it right?

Solving this puzzle involves addressing a series of moving pieces.  There should be a rational connection between job descriptions, role expectations, market compensation data and job level.  Once you’re there, develop a clear process for managing and governing how jobs are created and assigned to levels.  There are a number of behind the scenes mechanics and data management issues that must be addressed for this to work properly and ultimately for leaders and managers to effectively use the structure as a tool.  It can be difficult and messy work….but it can be done!

About the author:

Joe Farris is a co-founder at Nua Group, a San Francisco-based Human Resource Consulting firm specializing in total rewards. Joe challenges organizations to think beyond the median, focusing on people-related investments that drive meaningful workforce and business outcomes. He helps organizations build great companies through bold and differentiated people strategies.