In 2023, a mid-sized catering company based in Port Harcourt closed its doors despite having loyal customers and high demand. What went wrong? The owner cited spiraling labour costs as the primary reason. Staff salaries, overtime, allowances, and compliance with new labour laws outpaced revenue growth. “I was working just to pay salaries,” she lamented.
This story isn’t unique. From tech startups in Lagos to manufacturing outfits in Aba, labour cost management has become one of the most pressing issues in today’s business landscape – especially in an economy where inflation, minimum wage revisions, and currency devaluation threaten margins.
Managing labour costs is not about cutting jobs or slashing salaries – it is about smart, strategic decision-making that ensures your workforce is productive, engaged, and sustainable.
This article looks at how businesses, especially in Nigeria and other emerging markets, can effectively manage labour costs without sacrificing quality, compliance, or team morale.
Labour costs refer to the total amount employers spend on their workforce. It includes:
- Direct wages and salaries
- Overtime pay
- Bonuses and incentives
- Employee benefits (e.g., pension contributions, healthcare, transportation)
- Recruitment and training expenses
- Severance and legal compliance costs
According to the Nigeria Employers’ Consultative Association (NECA), labour-related expenses account for over 40% of operating costs in service-based businesses and 25-35% in manufacturing – underscoring their impact on profitability.
Why Labour Cost Management is a Business Imperative
1. Economic Instability and Inflation
Nigeria’s economy continues to battle inflation (hovering over 20% in 2025), eroding both employer margins and employee purchasing power. Labour costs automatically rise with demands for wage adjustments.
2. Regulatory Compliance
The proposed upward review of Nigeria’s minimum wage means businesses must brace for higher salary obligations or risk penalties and unrest.
3. Competition
To stay competitive – especially with cheaper foreign imports or global digital firms – local companies must optimise operations, and labour costs are the biggest lever.
4. Technology Disruption
Automation, AI, and digitisation are transforming work. Companies that fail to realign their labour strategy risk being overstaffed or under-skilled – both of which are expensive mistakes.
Strategies for Managing Labour Costs Effectively
1. Workforce Planning and Optimization
Every business must answer this: Do we have the right people doing the right work at the right time?
- Conduct Job Audits
Regularly review roles to eliminate redundancy. For example, a logistics firm in Abuja merged three admin roles into one through automation, saving over ₦3 million annually.
- Shift from Fixed to Variable Pay
Offer performance-based incentives over blanket salary increases. This aligns costs with productivity. For example, pay sales teams a base salary plus commission instead of fixed high salaries.
2. Invest in Training and Multi-Skilling
A single multi-skilled employee may be more valuable than two narrowly skilled ones.
Instead of hiring multiple specialists, consider cross-training existing staff. In a bakery chain in Lagos, sales reps were trained to also manage inventories, reducing the need for full-time stock managers.
“The only thing worse than training employees and losing them is not training them and keeping them.” – Zig Ziglar
3. Leverage Outsourcing and Freelancers
Outsource non-core roles like IT support, security, janitorial services, or digital marketing to professionals who work on a contract or project basis.
This reduces long-term obligations like pension and gratuity. Freelancing platforms like Fiverr, Upwork, and even local ones like Asuqu and TERAWORK offer high-quality services at a fraction of the cost of full-time hires.
4. Embrace Technology
Digitising routine tasks cuts down on human resource needs over time. For example:
- Payroll automation tools reduce HR staff costs.
- Time-tracking software prevents time theft and overtime abuse.
- Inventory and POS systems reduce manual errors and allow lean staffing.
A fast-growing fashion retail business in Yaba implemented a cloud-based inventory and POS system and reduced its cashier count from 5 to 3, saving ₦1.2 million yearly.
5. Monitor and Control Overtime
Overtime, if unchecked, it can inflate your wage bill by 15 – 30%. Implement clear policies and approvals before overtime is allowed.
Tools like Clockify or Toggl Track can help businesses efficiently monitor and control working hours.
6. Review Compensation Structure
Not all benefits are appreciated equally. Conduct employee surveys to understand what they truly value. You may find that:
- Flexible hours or remote options may be more valued than a transport allowance.
- Health insurance may outweigh phone stipends.
Tailoring benefits not only saves costs but also boosts retention.
7. Reduce Turnover
High employee turnover is expensive: recruitment, onboarding, training, and downtime all add up.
Retaining good employees through better engagement, feedback mechanisms, and recognition programmes is cheaper than constantly hiring.
According to Jobberman Nigeria, it costs up to ₦300,000 to replace an entry-level employee – and much more for managerial roles.
Local Considerations for Labour Cost Management
- Nigeria’s Labour Laws
Businesses must ensure compliance with:
- National Minimum Wage Act
- Pension Reform Act
- Employee Compensation Act
Violations attract fines or even closures. Smart labour cost management means cutting waste, not corners.
- Informal Sector Lessons
Nigeria’s informal businesses (barbers, food vendors, tailors etc) often survive because of lean cost structures, incentive-based pay, and flexible staffing. While not always scalable, their frugality mindset offers valuable insights.
- Consider Regional Wages
Labour costs in Lagos differ from those in Kano or Enugu. Businesses expanding geographically must align wages with local standards without compromising fairness or morale.
- Across-the-board pay cuts: This demoralizes high performers and may lead to mass resignations.
- Over-automation: Not every task should be automated – sometimes human interaction adds value.
- Neglecting compliance: Cutting labour costs without legal due diligence can backfire badly.
Conclusion
Managing labour costs is not about being stingy – it is about being strategic.
A well-managed workforce is a competitive asset, not just a cost. It delivers value, drives innovation, and keeps customers satisfied.
As the Nigerian business climate continues to evolve – with AI adoption, wage policy changes, and a rising gig economy – leaders must rethink traditional models of employment.
It is time to ask:
- Are you paying for time or for results?
- Are your people building your brand – or simply draining your resources?
- Are you adjusting your labour structure in line with your growth stage?
The businesses that will thrive in this economy are not the biggest – but the most adaptive, especially when it comes to managing people and payroll.
“Take care of your employees, and they will take care of your business.” – Richard Branson
Contributed by Agolo Eugene Uzorka, a Human Resource Consultant and Content Writer.
