Reducing Wages vs. Terminating Employees
The subject of whether you should reduce wages (i.e. lower the hourly rate for all employees by a specific percent) as opposed to terminating an employee has come up on two or three occasions in the past couple of months.
In one case specifically, a former client told me how much she was sacrificing to save her business and she had instituted an across-the-board pay reduction of 15%. In another case an owner asked me in advance what I thought he should do, reduce payroll or terminate employees.
I am emphatic that you should never penalize an employee team by exacting from them something they previously earned. If business slows down dramatically, it is your responsibility to lead the company by making hard decisions, and in my opinion reducing hourly rates in order to assure that everyone keeps their job is not the way to do it!
Most owners are exposed to the idea of reducing hourly rates across-the-board from listening to the evening news and hearing stories about trade unions agreeing to accept a cut in pay. Think about it, from the employee's standpoint and even more so from the union's standpoint, that is a smart move. The employees love the union for saving their jobs and they hate the employer for reducing their wages. The union finds itself in a win-win situation. The bottom line is what works for larger corporations and unions does not work for small businesses.
If you have a team of seven employees and their total annual payroll is $237,120 and you decide to reduce their payroll by 15%, that will lead to an annual savings of approximately $35,568.
Every single employee will be affected by this pay cut and every single employee will suffer. Worse, the pay cut will probably be accompanied by a speech by you that says something to the effect, "Folks, we are going to have to work harder than ever before as a team and I expect everyone to pitch in during these challenging times."
No matter how hard you try and no matter how sincerely you make your case, they will not believe you, even if you tell them you too are taking a paycut, or haven't received a paycheck in three months.
What will happen is that seven employees will be disgruntled by the suggestion that they should continue to work just as hard but work for 15% less pay than they received before. Every single employee will feel this way, no matter what you say or do.
My strong suggestion is that you thoroughly examine you list of employees, calculate your SPE which is probably lower than it should be, and then terminate the least productive of the team. In a real-world scenario involving seven employees with hourly wages ranging from $20 per hour down to $12 per hour, the reduction of virtually any single employee (but for the lowest paid) will accomplish the same $$$ savings that you would have accomplished from a 15% pay cut across-the-board.
Told of the options you faced after you have made the decision, the remaining employees are far more likely to respond to a pep talk than a speech announcing a 15% pay cut across the board.
A pay-cut embitters all employees, while a termination impacts only one.
A pay-cut will most definitely negatively impact the morale of the entire company, forcing many of the better employees to start looking for other jobs. A termination of one employee, on the other hand, will clearly convey to the remaining employees how serious you are and the steps you are prepared to take in order keep the company going.
By the way, don't be surprised, especially if you terminate the "right" employee, that one or more employees come up to you later and gently chide you that you should have made that move much earlier.
P.S. You can subscribe to this blog and read new entries as they are posted by using I Power Blogger, or clicking on this link: http://www.quickconsultant.com/blog/atom.xml
In one case specifically, a former client told me how much she was sacrificing to save her business and she had instituted an across-the-board pay reduction of 15%. In another case an owner asked me in advance what I thought he should do, reduce payroll or terminate employees.
I am emphatic that you should never penalize an employee team by exacting from them something they previously earned. If business slows down dramatically, it is your responsibility to lead the company by making hard decisions, and in my opinion reducing hourly rates in order to assure that everyone keeps their job is not the way to do it!
Most owners are exposed to the idea of reducing hourly rates across-the-board from listening to the evening news and hearing stories about trade unions agreeing to accept a cut in pay. Think about it, from the employee's standpoint and even more so from the union's standpoint, that is a smart move. The employees love the union for saving their jobs and they hate the employer for reducing their wages. The union finds itself in a win-win situation. The bottom line is what works for larger corporations and unions does not work for small businesses.
If you have a team of seven employees and their total annual payroll is $237,120 and you decide to reduce their payroll by 15%, that will lead to an annual savings of approximately $35,568.
Every single employee will be affected by this pay cut and every single employee will suffer. Worse, the pay cut will probably be accompanied by a speech by you that says something to the effect, "Folks, we are going to have to work harder than ever before as a team and I expect everyone to pitch in during these challenging times."
No matter how hard you try and no matter how sincerely you make your case, they will not believe you, even if you tell them you too are taking a paycut, or haven't received a paycheck in three months.
What will happen is that seven employees will be disgruntled by the suggestion that they should continue to work just as hard but work for 15% less pay than they received before. Every single employee will feel this way, no matter what you say or do.
My strong suggestion is that you thoroughly examine you list of employees, calculate your SPE which is probably lower than it should be, and then terminate the least productive of the team. In a real-world scenario involving seven employees with hourly wages ranging from $20 per hour down to $12 per hour, the reduction of virtually any single employee (but for the lowest paid) will accomplish the same $$$ savings that you would have accomplished from a 15% pay cut across-the-board.
Told of the options you faced after you have made the decision, the remaining employees are far more likely to respond to a pep talk than a speech announcing a 15% pay cut across the board.
A pay-cut embitters all employees, while a termination impacts only one.
A pay-cut will most definitely negatively impact the morale of the entire company, forcing many of the better employees to start looking for other jobs. A termination of one employee, on the other hand, will clearly convey to the remaining employees how serious you are and the steps you are prepared to take in order keep the company going.
By the way, don't be surprised, especially if you terminate the "right" employee, that one or more employees come up to you later and gently chide you that you should have made that move much earlier.
P.S. You can subscribe to this blog and read new entries as they are posted by using I Power Blogger, or clicking on this link: http://www.quickconsultant.com/blog/atom.xml
Labels: pay-cuts, Reduction in hourly wages, terminating employees
posted by The Quick Consultant at
9:14 AM
1 Comments:
John, what about a wage freeze or benefit cuts? We are seeing again this year a double digit increase in health and pay 75% of that cost.
I am looking at not keeping during our slow time, one employee and cutting back to 35 hours the rest of my staff or giving raises to spring or summer.
This is not reactive we have an good year but not great year, others years we did not do this but carried too much staff for our 3 slower months of Nov-Jan. This is proactive not a reactive move. I can get by without doing any of it, but I can increase profits if I do some or all of it. The question is the balance act of what impacts the long term? As your article says is the ill will of the staff outweighed by the higher profit? The person is laid off unless sales stay up which has not happened before.
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