Cutting Salaries in a Recession

Employers who slash employee pay need to make clear it's a temporary measure or talent will jump ship.

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I am a manager in a small software company. We're beginning to experience difficult AR collections as well as declining sales—a bad combo for a small company with little to no cash reserves, but that's a rant for another time.

My immediate problem is that the president of the company wants to implement 15 percent pay cuts. And, he wants to keep them indefinitely even when the financial picture improves. He's under the impression that employees are worth less money in a recession and argues it's simple supply and demand to drive down the market price: There are fewer jobs available as well as more qualified candidates. It sounds like crazy Reaganomics to me.

Crazy, perhaps, but not Reaganomics and not crazy for the reasons you think it is. (Unless your boss also wants to lower marginal tax rates, which, in my book, would be great, but I doubt he has the power to do so.) 

Your boss is right. When unemployment is high there are more people for fewer jobs. Therefore, people are willing to take less money for a job than they would when unemployment was low. After all, a lower-paying job that you have is much better than an imaginary higher-paying job. 

Your company isn't bringing in as much money now as it once was. Just where do you think paychecks come from? It's not from the paycheck fairy. Your boss is understandably concerned about money. But this is where he gets crazy. 

In most companies, but especially one like yours that develop software, people are your best and most expensive asset. But that doesn't mean you can always pay them at high levels. 

I have no problem with a statement to the company like this: "As you know, revenues are down, so I had to make a choice. I either have to implement layoffs or I'm going to have to decrease salaries, including my own. I've thought long and hard about this and I really want to make this business successful for all of us, so I've decided to implement a 15 percent pay cut across the board." 

Then here is where your boss screwed up. His next sentence should be: "And when our revenues return to 2007 levels, we will ratchet everyone's salary back up." Because keeping salaries down when revenues are good is the crazy part. By giving an actual, measurable standard (2007 revenue levels), employees will know when their salaries will rise. They can work to achieve that. His way of doing it says: "I care about me, me, and did I mention me?" It will alienate employees, and why should they work harder if they'll never recover the 15 percent? 

What he needs to do is weather the hard financial times. Announcing that you are willing to take advantage of your employees is not weathering the hard times; it is taking advantage of a situation. Sure, he'll be able to retain people for a while. After all, there are not as many jobs out there. But as soon as the financial picture starts to improve, he will lose his best people. Not his worst—they'll stay because they won't be able to make more money elsewhere—but his best people will walk out the door. 

It's his business, so he can do what he wants. I wouldn't want to be him when the general economy improves, because his business won't improve with it. His good people will be gone and he won't be able to replace them for the salaries they left with. In fact, if there is any way to avoid cutting salaries, he should take it. If there is no other way, then make sure it's a temporary cut. And make sure the employees know that.

Suzanne Lucas has nine years of Human Resources experience, most of which has been in a Fortune 500-company setting. She holds a Professional in Human Resources Certificate from the Society for Human Resource Management. She blogs at Evil HR Lady.