Last newsletter, we talked about shared sacrifices and how they need to start at the top. A few days later, the Wall Street Journal talked about how in this recession, some employers are using wage cuts instead of job cuts to address the slowing economic realities.
“Heavy equipment maker Caterpillar Inc. announced in late December it would cut executive pay by half, and many salaried employees would see cuts of as much as 15%. Hutchinson Technology, a Hutchinson, Minn., maker of disk drive components, cut salaries 5% for employees who remained after a round of layoffs concluded this week. In Galveston, Texas, police and firefighters unions agreed to a 3% pay cut as the city grapples with the recession and the aftermath of Hurricane Ike.”
The Federal Reserve’s mid-January survey cited other examples of companies cutting wages instead of jobs. Some companies are reducing or eliminating merit-based increases and contributions to 401k plans. And according to a survey by the National Federation of Independent Businesses, 7% of small businesses have reduced salaries; the highest percentage since the survey began 35 years ago was 4%.
And last week, President Obama announced he was freezing salaries of those White House staffers making over $100,000.
Are pay cuts a better idea for your company than job cuts?
Two different scenarios illustrate how pay cuts can reward companies – and their employees – in the long run.
A small manufacturing firm found contracts dried up immediately after 9/11. When it became clear cuts were needed, the company announced executive pay cuts of 15%. Sixty days later, with business still down, the company asked all other employees to take a 10% cut. They agreed. By spring, the company received a big contract. The company restored all employee wage cuts and gave them back pay and interest.
In November, a small consulting firm found business drying up overnight in this latest recession. The company president asked its only full-time employees, who are all sales people, to take 75% cuts in their base salaries and to cut their hours commensurately. They agreed, but they continued to work close to normal hours. When contracts began coming in earlier this month, the president restored their base pay. The first contract they received after the new year prompted an email from one of the employees to the entire company. She said they won the contract in a tight fight with their main competitor, and concluded, “I think this is a good sign…. Still lots of potential for a great 2009…. Doom and gloom be damned!! We’re cooking with gas now!! Let’s hear it for [name of company]!!!!
You don’t need the exclamation points to hear the enthusiasm by a worker who just lost 75% of her base salary.
Why did these pay cuts work? In the first case, the executives made the initial sacrifice, and the country was in shock. It was a time for people to stick together. More important, the executive pay cuts were in place long enough to demonstrate to employees that senior management was serious about shared sacrifice. In the second instance – and this holds for other companies today – is that other job options are simply not there. People would rather take a cut in pay than lose their jobs entirely, especially those who receive commissions, as they are directly in control of their destinies. Besides, another job is not likely to be easy to find.
Generally, pay cuts instead of job cuts can work for a number of reasons:
- By asking for pay cuts, you’re asking people to be part of the solution. They are likely to prefer that than being just another survivor in a cut-throat world.
- When you cut jobs, you’re asking people to do more with less. That adds stress. They’re already worrying if the next round of layoffs will include them, and you’re asking them to do more. Stress doesn’t necessarily lead to productivity.
- By asking for pay cuts, you’re getting buy-in throughout the organization. It’s an affirmation of the company’s strategy.
- Perhaps most important in the long run is that you keep your talent. For all the talk about cutting fat, the truth is that eliminating jobs in recessionary times often cuts into the muscle and bone of an organization. And once better times return, you are left with human capital deficits that can’t be reversed quickly. You’ve lost the time and money you invested in those employees.
Assessing how best to navigate a recession isn’t an easy task. Much thought and planning is required. The challenge is to look beyond how to stop the bleeding and consider the long-range health of the patient – your company.
If you have questions or need help navigating the current recession, please call Human Capital Advisors at 703.978.4333 or email us.
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