An Executive’s
Guide to Cutting
HR Costs
An Executive’s Guide to Cutting HR Costs
It’s no surprise that most people like to do what they’re best at, and small businesses are no different. Most small
business executives want to focus on their core business—usually the founder’s area of expertise.
Still, the economics of profit and loss demand that entrepreneurs must deal with what they may view as the “HR troll”—
the all-important but dreaded management of human capital and the programs that are as important to the healthy life
of the company as food and water are to the human body. You can ignore what’s good for you for only so long. And
then it catches up with you.
Entrepreneurial execs know that they need to follow the rules, but they may not realize what decisions may lead to the
two vital components that keep HR costs lower:
1. Increasing productivity
2. Minimizing human capital expenses
The following paper will focus on minimizing human capital expenses in four areas:
1. Hiring the right person for the right seat on the right bus
2. Improving performance with motivational yet balanced total compensation
3. Complying with the law
4. Offering competitive benefits, communicated effectively
“Hire the right person for the right seat on the right bus”
(a.k.a recruitment and retention)
Barbara Spector of SmartMoves! (
) advises small businesses to “hire the right
person for the right seat on the right bus,” borrowing a quote from Good to Great by Jim Collins. She urges, “Think of
the small amount of investment involved here compared to what it costs if you hire the wrong person.”
Scott Hauge, president of Cal-Insurance and founder of the Small Business Commission in California, reinforces
Spector’s admonition: “Hiring a bad employee is really expensive. Set up a hiring procedure to know which questions
you can [and should] ask … You can’t pay someone enough to [pick up the slack of] a bad employee … it sends a
message to good employees that they’re going to have to do the work that the bad employee can’t or won’t do.”
Most hiring managers will tell you that they want to hire the right person. But how do you translate dozens or even
hundreds of resumes into the employee your company can’t live without?
“Most companies hire on skill, fire on fit,” Spector observes. “And that’s a mistake. To find top talent, first you have
to define superior performance. Then you’ve got to take that definition and apply it to performance-based behaviorial
interviewing and other strategic recruiting techniques to attract the best candidates.”
With recruitment, Spector says, success or failure depends on four additional measurements of prospective
employees—those soft skills that cannot be accurately discerned in an interview:
1. Personality. How will they approach their work? Do they have the necessary drive? Do they have the right attitude
to achieve the desired job results?
2. Cognitive ability. Will they be able to cope with the mental demands of the job? How do they solve problems? How
will they communicate?
An Executive’s Guide to Cutting HR Costs
3. Occupational interest. What type of activities will motivate and prompt candidates to succeed? In what type of culture
or environment will they thrive?
4. Job Match. How do candidates’ overall make-up (items 1-3) compare to your best performers in the same job?
According to Spector, combining a performance-based interview approach with this four-part assessment method will
vastly increase your success rate in hiring the right employee, especially when compared with traditional methods:
Hiring method
Success rate
Traditional 1-on-1 interviewing
Behavior-based interviewing
Validated job match using
assessments of the measurements
above (personality, cognitive ability,
occupational interest)
75% or higher
What happens if, despite your best efforts, you end up with no-talent talent? Determine the issue, says Spector, who
has devised the following table modified slightly by TriNet for this white paper.
Source: Barbara Spector, SmartMoves! 2005
“Lastly,” says Spector, “once you have the right person in the right seat, survey that talent regularly to assess job
satisfaction. This significantly impacts retention and keeps your organization tuned in to what your employees are
needing from and appreciating about your company.”
While most small businesses wouldn’t be inclined to conduct surveys in this way, employees may surprise you with
the simplicity of their feedback. And it’s okay to set an expectation that the company can’t or won’t comply with every
suggestion for change.
A. High Skill, Low Job Fit B. Reassign and retrain
A. High Skill, High Job Fit B. Retain and protect these
people … they're your top
A. Low Skill, Low Job Fit B. Get rid of
A. Low Skill, High Job Fit B. Train
Skill and Fit Assessment Action Plan
Skill and Fit Assessment Action Plan
If your employee has A., then do B.
An Executive’s Guide to Cutting HR Costs
Incent performance with motivational yet balanced total compensation.
MBA graduates may learn that both negative and positive reinforcement will motivate people to perform. But as the
saying goes, you get more with sugar than you do with spice. The “sugar” you offer can take many forms, such as these:
Implement pay-for-performance programs. Providing incentive pay may seem counterintuitive to a treatise on
keeping costs in check, but in the long run, it could be your best weapon against out-of-control expenses. With
clearly communicated and reasonable goals, who wouldn’t work harder or more effectively for a little more cash in
their pocket? Nothing motivates a team to work together the way you want than incentive pay.
Eliminate the guesswork on competitive compensation—use compensation surveys. Compensation surveys help you
to benchmark your company’s salaries against similar companies’ salaries to ensure that you are paying your staff
at market rates. Radford Surveys, a division of Aon Consulting, has one of the best reputations in the compensation
survey world and can offer compensation surveys that re?ect small employers’ smaller budgets. In addition, other
benefits consulting firms such as Hewitt and Mercer offer similar surveys. (Mellon has one in development.)
Offer ?exible work schedules. In a recent survey, when employees were asked if they’d rather have more pay or
more time off, they chose more time off. Some employers—large and small—offer every other Friday off as an
incentive to remain with the company and to work harder on the days that employees are in the office. Flexibility
can translate to loyalty for working parents and anyone trying to manage busy lives while giving 100% at work.
Reward employees through low-cost alternatives, such as:
Parties (e.g., birthday parties, “success celebrations”)
Other special events (e.g., luncheons, movie outings, golf outings)
Spot rewards for exceptional performance (e.g., spot bonuses, gift certificates, dinner-for-two, sports tickets)
Informal time off (e.g., Friday afternoon off)
Company-branded items (e.g., t-shirts, hats, coffee mugs)
Ask your employees for ways to cut costs. Generally speaking, employees know their jobs better than anyone else.
What they’re complaining about around the water cooler could translate into lower HR costs for you.
COBRA, ERISA, HIPAA … say what? Compliance.
One of the smartest and most cost-effective strategies that you can adopt as a small employer is to comply with the law, the
mother of all HR trolls. Compliance may sound simple enough, but employment laws—mainly state and federal—are copious
and complex. They dictate nearly every aspect of the management of human capital from how you hire and fire, to how you
pay, to how you provide benefits.
Compliance boils down to this: Don’t give the IRS or any other government agency a reason to become interested in
your company. To help you accomplish this, here’s some advice from the experts on avoiding the potential pitfalls:
Independent contractors. When asked what is the single largest legal pitfall, Hauge warns small businesses
“to be very careful with independent contractors. So many people try to get around hiring employees by using
independent contractors. They do a 1099, but in the eyes of the state and the IRS, the workers are employees.” If
the worker becomes injured and files a claim for workers’ compensation, the IRS can slap the employer with the
cost of the care plus hefty penalties. Hauge uses a straightforward 20-point IRS test to avoid this expensive pitfall:
Health insurance. Providing a generous health insurance plan can be one of your greatest recruitment and retention
tools. Know the laws that govern how you provide it.
An Executive’s Guide to Cutting HR Costs
For simply written and palatable information on health insurance for small businesses, visit California Health Care
Foundation’s comprehensive, impartial website at
. Click
“Rights and Rules Affecting Employers,” and then “Laws Related to Health Insurance.” The site provides valuable and
detailed information on federal and state laws, such as COBRA and HIPAA, by employee size. In addition,
is almost a required read for small businesses.
Overtime and job classification rules for exempt employees. Even Hauge, a small business veteran, admits “The
overtime rules are so confusing.” You’ll find that defining an employee as exempt can vary depending on what
percentage of the employee’s time is spent on exempt job functions. For example, if an employee spends more than
50% of a 40-hour work week digging ditches, the employee cannot be considered exempt by California standards. By
federal standards, more than 40% of a worker’s time must be allocated to exempt tasks. And classifying how much
time counts as overtime varies according to federal and state law as well. If an employee in one week works 10 hours
on a Monday, six hours on a Tuesday, and eight hours on a Friday, by federal law, the employee is not entitled to
overtime, because the employee only worked 24 hours that week. By California law, the employee is entitled to two
hours of overtime for the time worked on Monday.
For more information on the Fair Labor Standards Act that governs overtime pay and an easy-to-read description
of determining overtime and job classification, visit
a California-specific version, read the “Exempt versus Non-Exempt Employees” article available in the HR Resources
section of
Harassment or discrimination laws. Lack of training can get employers into hot water. A new California law, AB 1825,
requires employers to provide two hours of sexual harassment training to managers every two years. Administrative
damages can reach $150,000 if handled internally through the Fair Employment and Housing Commission, or if filed in
state court, can be unlimited. In federal court, damages for emotional distress are limited to $300,000.
Disability and leave laws. These laws can become very tricky to implement. If you make a mistake, you’ll face not
only the fines of several government agencies, but also the ire and distrust of your employees, which will linger for
eternity. Numerous leave statutes, particularly in California, require experienced coordination and communication.
In addition, the statutes interact with traditional time-off programs, such as pregnancy disability, vacation, and sick
leave, long-term disability, and long-term care. Small employers need to know when they can or should provide
the leave and/or dock employees for time away from work for medical purposes—it differs for hourly and salaried
employees. Disability and leave laws include:
The California Family Rights Act
Short-term Disability Insurance benefits
State Family & Medical Leave Act
Federal Family & Medical Leave Act
Paid Family Leave also known as the California Family Temporary Disability Leave Act (
Workers’ compensation benefits
Ensure that you have a written injury and illness prevention plan. Hauge estimates that 75% of businesses under 10
employees don’t have one. That can lead to trouble if an employee becomes injured on the job. For example, let’s say
that you hire an employee and on the first day at 8:15, the employee is injured. If you file a report, the claim is entered
into your experience and you could be hit with a 30% to 50% surcharge in workers’ compensation fees. If the worker was
previously injured and the claim is suspect, then the business owner may have the right to replace the employee. But be
very careful: insurance brokers such as Cal-Insurance at
have experts who can give you guidelines.
In addition, you may need legal advice and should seek out a lawyer.
An Executive’s Guide to Cutting HR Costs
Small employers may also need to adhere to the following laws, depending on their company size and jurisdiction:
California Domestic Partner Rights and Responsibilities Act
Working Families Tax Relief Act of 2004 (WFTRA)
California Occupational Safety and Health Act (Cal-OSHA)
Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA)
Fair Employment and Housing Act (FEHA)
San Francisco Administrative Code 12A, the gender identity protection – a local law with no comparable federal or
state brethren.
Employment law also varies depending on company size:
For 100 employees and above, all laws apply.
For 50 employees or more, most laws apply.
For 25 employees or more, some laws apply.
When you get below that number of employees, the applicability of federal and state laws ?uctuates wildly. For more
information on the laws that govern all small business employers, visit
, or the HR Library section of
Offer competitive benefits, communicated effectively.
Like most executives, you want to know that you aren’t paying more than you have to, but your employees feel
motivated to perform. Offering the right benefits package can help you achieve this goal.
Benefits differ between small and large employers
The standard list of benefit categories may look the same for small and large employers, but the plans, features, and
services offered can be as different as black and white. The standard list would include insurance coverage for medical,
dental, and vision care as well as short- and long-term disability, life, accidental death & dismemberment (AD&D), and
more and more frequently, long-term care. In addition, most employers offer some sort of retirement plan, defined
benefit (traditional pension plans) or defined contribution plans, such as a 401(k). Very small companies may consider
individual retirement accounts (IRAs) designed specifically for them, such as SEP IRAs, but most tend to stick with a
401(k) plan.
For small employers, the level of benefits is generally much lower than that provided by large employers, the level
of risk to the employer is much higher, and the cost per employee can be higher as well. Benefits, such as health
insurance, and the cost of providing those benefits can vary widely depending on:
Amount of compensation
Claims history and amount of high-dollar claims, such as treatment for cancer
Level of education
Number of employees and eligible family members
You’ll want to choose your vendors wisely. If you’re looking for health insurance, for example, choose a solid
administrator. That means someone who can pay claims promptly, provide intelligent customer service, offer great
discounts, and handle various financial and funding arrangements that will grow with your company.
Your vendor should provide some degree of technology as well. For many small businesses, keeping up with the rapid
An Executive’s Guide to Cutting HR Costs
changes in technology just isn’t feasible. These days, employees expect robust benefit technology. Not only must the
technology provide information, but it must also handle transactions, track claims, and in the case of healthcare, provide
specialized applications such as health risk assessments.
So, what benefits do you offer?
Health. It’s recommended that companies offer a generous benefit plan from Day 1, providing a rich plan that
encourages employees to stay on and help grow the company over the long term. For example, offer a plan that pays at
least 90% of the cost of a PPO and include dental and vision plans.
Here are some tips on cutting costs:
Pass on some costs to employees. In some cases this strategy makes sense, especially if employees are paying 0%
to 10% of the cost of their health insurance. However, the strategy is likely to backfire if your employees aren’t happy
about it. In addition, your insurers will restrict your efforts to pass on the cost because they may deem the cost to
employees to be prohibitive. For example, if you want to pay only 60% of the premium, insurers may require you to
provide 80%. Without this provision, insurers believe that only the sick people will sign up.
Implement higher deductibles, assuming your employees can meet them.
Encourage employees to spend their healthcare dollars wisely. Because administrative costs of health insurance plans
run on average about 30%, educate your employees wherever and whenever you can that you want them to get the
care they need, but you also want them to make smart choices about spending their healthcare dollars.
For example, you can ask employees to question their doctors and other healthcare providers to ensure the best
possible treatment is prescribed. These questions could include, “Should I get a second opinion?” and “What are
my alternatives?” Again, you want to encourage employees to seek treatment, particularly preventive check-ups,
but they should also know that some medications (such as antibiotics) are overprescribed.
Push for more disease management programs, which can justify their return on investment—however, HIPAA
confidentiality rules may limit the amount of disease management within a small company.
Implement wellness programs to encourage employees to stop smoking, lose weight, and maintain healthy blood
pressure. Check with an expert in the field or an employment lawyer before you do, however, because employees
or those who weren’t hired could view some programs as discriminatory.
Above all, communicate, communicate, communicate! This may come as a shock, but even the people who write
benefits materials don’t read their own materials. Why? Because traditional benefits booklets tend to have all the appeal
of a chewed boot. Invest in a communication program that includes well written, succinct, compelling, and palatable
descriptions of your programs as well as four- or two-color professional printing. In addition, hold regular employee
meetings to roll out new plans or just help employees understand the value of their benefits and how to use them,
including how to keep costs low for themselves and the company. Open enrollment is a perfect time to ask employees to
assess whether their plan choices meet their lifestyle needs, particularly for employees who have gotten married or had
children in the last year.
Dental & Vision. Some experts advocate not offering these plans at all, because the cost/benefit ratio isn’t always worth
what you pay in insurance costs. Says Hauge, “Dental is expensive – a lot of it could be trading dollars.” Still, you have to
assess your workforce – if your employees are accustomed to having these benefits at other companies, they may perceive
your efforts to keep costs low as stingy rather than as a smart business move. Again, if you have intelligent, hard-working,
and loyal employees whom you would like to retain, offer dental and vision coverage.
An Executive’s Guide to Cutting HR Costs
Cafeteria plans. “Cafeteria plans make good sense,” Hauge says, “And employees really like them.” If you implement
a cafeteria plan, such as a Healthcare Spending Account or a Dependent Day Care Spending Account, include
comprehensive communications as part of your effort because you’re going to need them. All of these plans provide
pre-tax savings, but may differ slightly in the types of claims that are eligible for deduction or payment. In addition,
employees must use all of the cafeteria plan funds by the end of each calendar year.
401(k) plans. Offering a 401(k) plan is a no-brainer for a company on the rise. It can help employees save money – on
taxes and for retirement. According to Wikert, however, some firms are re-examining whether they want to continue
to offer a 401(k) based on fiduciary liability issues. Employers offering plans must have sufficiently diversified
investments, and they must watch how they match employees’ contributions, if at all.
Life and Accidental Death & Dismemberment insurance plans. Life and AD&D insurance can be relatively cheap, but as a small
business, you should watch how you define the base pay that these plans may depend on. Wikert notes that most companies
may include measured commissions, but they do not include bonuses. The goal is to sustain, not overin?ate the benefit.
Long-term disability and long-term care plans. Most small employers don’t typically offer these plans, but if your competition
does, you may want to comply. Long-term disability tends to be expensive says Wikert, but employees may have more trouble
getting that coverage on their own because of medical evidence restrictions.
Workers’ comp. Well, you have to offer this coverage, so it’s not your typical employee benefit. Still, you need to watch
your costs. Thankfully, workers’ compensation costs have finally started a downward trend— the average according to
was $5.34 per $100 of payroll in July 2004, down from $6.35 in July 2003.
The benefits of HSAs
Some experts speculate that the most cost-effective option for highly compensated, highly educated employees of
small firms is the Health Savings Account (HSA) plans. These plans appeal to some employers because they:
Cost significantly less than most health plans because they don’t provide what’s known as first-dollar coverage—
payment for the first dollar of claims incurred by the employee or a family member.
Allow the employer to offer competitive health insurance that it might not otherwise be able to afford to offer.
Put the purchasing decision for healthcare services in the employees’ hands, making employees the users and payers
of their care. It’s an incentive for employees to compare costs, services, and providers to determine which is the most
cost-effective. The concept behind HSAs is that they discourage employees’ belief that an office visit costs $10, instead of
$110, and that this realization will lead to lower cost choices in healthcare.
And, employees who can afford them like them because HSAs feature:
Lower monthly premium costs
Tax-free savings accounts to pay for healthcare—generally speaking, the accounts are exempt from federal, state, and
employment taxes, although states such as California have not committed to that exemption yet.
Account earnings grow tax-free and are portable—employees can take them to any employer.
No “use it or lose it” provision, so employees can start saving money into the account when they are most likely
younger and healthier, then continue to save into their later years.
The disadvantages of HSAs
1. Hauge and other experts agree that HSAs are not the answer to employers’ cost-cutting quests, however. “HSAs
do not receive a very positive reaction from small business owners, because it can create a problem for employees
An Executive’s Guide to Cutting HR Costs
who can’t come up with the money.” That said, even highly compensated employees may not want to fork over their
hard-earned money for healthcare expenses—especially those employees coming from larger companies where the
benefits may have been more generous.
2. In addition, the portability of the account allows employees to take it with them to another employer. That reduces
the incentive to stay with your company because of a favorable benefit plan.
3. HSAs are fairly new. Insurers offering the plans haven’t necessarily learned how to streamline their administration
efficiently. HSAs also allow employees to use the money in their account for whatever they choose, though a 10%
penalty applies if the money is used for non-medical purposes.
4. Merritt Wikert, Director at Mellon Human Resources & Investor Solutions, a subsidiary of Mellon Financial
Corporation and one of the larger benefits consulting firms, adds that the plans do not allow for a drug copay until
after the member meets the deductible, so an employee would have to pay $1,000 or more out of pocket before the
plan would cover the majority of eligible prescriptions. Under HSAs, the plan deductible must be at least $1,000
individual and $2,000 family in 2005. These deductible levels will rise over time and are prescribed (as will the
amounts individuals and families are allowed to contribute to their HSA). The plans usually cover the first dollar of
preventive benefits, while they don’t cover nonpreventive benefits and prescription drugs until after the employee
has satisfied the deductible.
5. While one of the benefits to HSAs from the employer’s standpoint is that the plan forces employees to see the
real cost of their healthcare, it’s not a pleasant reminder. For example, employees may shop around if their doctor
tells them the cost of an office visit is $150, not the $10 that they would normally pay through a copay system. The
unfortunate result? An employee may scramble to find another, less expensive doctor whom the employee may or
may not feel comfortable sharing the intimate details of a medical condition.
6. Generally, all of the experts agree that an HSA isn’t going to appeal to highly skilled employees used to
working at large companies where workers receive first-dollar coverage.
The Bottom Line
HR is a tremendously important resource in the business equation, but finding ways to cut its cost isn’t easy. The
twin goals of increasing productivity and minimizing expenses are the way to get there; put your focus on recruitment/
retention, compensation, compliance, and benefits. Doing so will help build a culture that’s not likely to be distracted by
inefficiencies in day-to-day operations, and therefore retains the ability to become a truly customer-focused organization.
And that’s the way to build a winning business.
The contents of this white paper have been prepared for educational and information purposes only. The content does not
provide legal advice or legal opinions on any specific matters. Transmission of this information is not intended to create,
and receipt does not constitute, a lawyer-client relationship between TriNet, the author(s), or the publishers and you. You
should not act or refrain from acting on any legal matter based on the content without seeking professional counsel. You
should contact your lawyer immediately regarding any and all HR matters.