47% Pay Cut In Lieu of Further Layoffs

Well,, it looks like I got out of my previous company just in time. First there was a round of layoffs, now the employees are facing a 47% pay cut for the remainder of Q1 and a subsequent 20% pay cut for all of Q2.

From The Chicago Tribune:

The company, which supplies office products to such retailers as Office Depot Inc., told its U.S. employees Monday that it would impose a 47 percent pay cut for six weeks, beginning Feb. 23.
After that, some of the pay reduction will be reinstated, with employees seeing their paychecks trimmed by 20 percent at least through the end of June.

“It’s an alternative to permanent reductions in force,” company spokesman Rich Nelson said. “It allows people to stay employed, but we realize it imposes some hardships as well…

For Acco, which trimmed its global workforce by 500 positions through layoffs and attrition last year, the draconian pay cut is “a matter of making sure we meet our plan for the first quarter of 2009,” said Nelson.

To ease the pain, Acco executives told employees it would provide short-term financial assistance to employees put in the “most extreme circumstances” by allowing them to borrow from future earnings. The salary cut will affect about 2,000 U.S. employees, including 750 who work in the Chicago area, the chief executive among them..”

It’s a double edged sword. Yes, employees get to keep their jobs but at what cost?

Losing close to 50% of one’s pay can put an employee in fairly dire straits, even if loans are available. As long as the terms for repayment are fair and take the employee into account, then it may be a short term solution for those in serious trouble. But if the company enforces strict deadlines and/or repayment schedules, then it may just be prolonging the agony. Unfortunately, I do know more about this situation than I feel comfortable sharing. Let’s just say that I think the latter will be more true than the former.

Is it really better for employees to keep their jobs under these circumstances? Wouldn’t it perhaps be better to “get the misery out the door?” per Truman Bewley, Yale Economics Professor? Will people quit and collect unemployment? Will they suck it up and see it through? Will they take the advice of others?

I don’t know the answer here. Though I’ve been on just about every side of the employment equation, I’ve never been in a situation where I’ve been asked to work for half my wages. Nor have I ever asked this of any employee.

Yet, this pay cut situation is becoming more and more common. Again, from the Chicago Tribune:

In December, FedEx Corp. said it would cut the salaries of 36,000 workers by 5 percent. Last month, Advanced Micro Devices Inc. said salary cuts of varying percentages would be made throughout the company. And last week, General Motors Corp. said it would cut U.S. salaried workers’ paychecks by up to 10 percent.

A Watson Wyatt survey of 117 companies across a broad range of industries in December found that 19 percent planned to institute salary freezes during the next 12 months.

When that same question was asked in October, it was 12 percent. Salary reductions were planned by 6 percent of companies surveyed in December, as opposed to 4 percent in the October survey.

Bremen believes the salary-cut trend is on the rise and will be considered more quickly during the next downturn.

I can’t even bear to think about “the next downturn”. This turn is down enough.

5 Replies to “47% Pay Cut In Lieu of Further Layoffs”

  1. Lori,

    I have a friend at Fed Ex and heard about the salary cuts. They went all the way up to the CEO level. I agree in principle that it is better to retain workers rather than cutting them loose, but there should be an incentive tied into the salary reduction such as the following:

    A pay cut of 10% over the next 6 months. Then if the company can meet its financial incentives (must be realistic and bought into by all employees) over the next six months or one year period, then the employees should get back that 10% and maybe an additional 1% for the inconvenience.

    You can structure it however you want. The goal is to get agreement from everyone as to the measurement of success and find a way to not only get everyone’s blessing, but get them to have a part in the financial incentive. Then if the company does not reach the goal, employees cannot say that Management is acting on their own to hold back or cut back more. It puts the pay for performance spin on the hopeful recovery of the company. The only other alternative would be to cut everyone’s pay with no incentive or reduce the workfoce to cut labor and fringe expenses.

    What do you think?

  2. I would consider letting them temporarily cut my pay if I still was able to keep my medical insurance. My brother-in-law is unemployed and they’ve bought medical insurance because they are a family of five, but the premiums are killing them.

  3. This is a common thing happening now. Everyone I know, or practically everyone has had a 10-20% paycut. All industries. I really dont think the pay will be coming back up, not for a LONG time…

  4. I do not not agree that it is a good idea to cut salaries instead of jobs.

    Don’t misunderstand, cutting jobs is painful and horrible, and I wish it could avoided. However, if a company is faced with a decision like this, by not cutting, they’re discouraging individual performance and recognition. What incentive does a top performer have to work hard if they know that they will get a pay cut and that their employer does now acknowledge that their performance is better than that of his/her peers? You cannot just make an assumption that all of your employees are fantastic, maybe if you’re a small company with 15 employees you can, but if we’re talking thousands, it is just a bad business decision that will encourage mediocrity and lack of progress. I think the only way this would be acceptable if you took a vote, and cut salaries for those employees that agreed to this.

    Socialism is NOT a good thing. I’ve lived it as well as communism, and, trust me, it doesn’t help save jobs or people or make better healthcare. It is a fantastic ideal, but it doesn’t work in a large community because there are always those who try to take advantage of free rides. Don’t mistake socialism’s ugly face for comradery and good human nature.

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