There are many situations in business where it becomes necessary to reduce expenses, like a bad economy, boneheaded tariffs, or the defection of a big customer. The challenge here is to tighten your corporate belt without losing the people you'll need going forward.

Based on my decades of watching companies belt-tighten under numerous situations and circumstance, I've the successful attempts follow three straightforward rules:

1. Explain your reasoning.

Employees aren't stupid; they're perfectly capable of understanding that when sales are down and costs go up, a company must do SOMETHING to remain profitable. And because they're not stupid, they're perfectly capable of understanding the "why" behind the difficult decisions about where to cut.

Surprisingly, though, managers often believe that employees should trust that management will do the right thing and make the best calls. Only one problem: employees aren't stupid. They know who's to blame for company's inability to predict and/or pivot: the management. Since management clearly screwed up, why would they trust that management is capable of making better decisions in this current situation?

The only cure for this perfectly valid skepticism is radical transparency. The CEO needs to say something like "here's the mistake I made" or "here's where I was blindsided" and then walk employees through the decision-making process by which specific belt-tightening decisions were made. Without this, employees will just assume that management is clueless. And the top talent will start editing their resumes.

2. Share the pain.

Historical fact: the greatest generals throughout history have been willing to share the same living conditions as their troops. This is a basic principle of leadership: if the organization is hurting, management must share the pain.

The dumbest belt-tightening I ever saw was when DEC--once the world's second-largest computer vendor--simultaneously announced a series of layoffs AND a pay rise for its newly-promoted CEO. A talent exodus immediately ensured.

Therefore, if you're cutting resources in the field but keeping your cushy, upscale corporate headquarters, you'd best have a damn good reason, like a long term lease. Rule of thumb: no belt-tightening with a cut in management pay.

3. Do it all at once.

People want to be in a company that's winning because it makes them feel like winners. When you belt-tighten, you're telling your employees that your company is losing and therefore they too are losers. It's a huge hit to your talent brand.

To overcome this perception, always position belt-tightening as a one-time event. The best analogy is surgery. You want it over and done as soon as possible. The last thing your employees want to experience is the death of a thousand cuts.

Just as important, explain exactly how you plan to get the company back into winning territory, and promise a return to something like the status-quo-ante. More than anything else, people inside a losing organization need hope that things will get better.

Published on: May 15, 2019
Like this column? Sign up to subscribe to email alerts and you'll never miss a post.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.