Why Salary Freezes and Pay Cuts Don’t Work
In these tough economic times, many organizations are looking for ways to reduce spending. Inevitably, payroll jumps to the top of the list of costly culprits because it is often one of the largest costs an organization has. But, does shaving down your spending on compensation through across-the-board salary freezes and pay cuts really result in true savings?
Why Don’t Businesses Make Across the Board Salary Cuts? A Negative Spiral
Before you chip away at the payroll budget, think about the effects that this move will have on your business overall. Cutting payroll costs is not the same as eliminating coffee service, or reducing the printing costs within a company. Payroll reductions affect the standard of living of your employees. This change can have a dramatic impact on morale which can then affect productivity which ultimately affects profitability. You can find yourself in a vicious cycle of reduced profits which lead to cost cutting which leads to lower productivity and even lower profits.
Think Before You Cut
There is nothing worse than taking money away from employees. In most cases, targeted and smart layoffs are easier for the organization to recover from than taking money away from employees. Not to mention that it is a lot easier to save dollars by focusing on a few employees than by taking a little bit away from everyone. Most Americans are living paycheck to paycheck. A reduction in pay can mean the difference between meeting all of their financial obligations or not. In our society today, too many people are living too close to the edge to absorb this type of financial hit.
One way to think about this is from a personal finance perspective. If you really needed to save money in your household, you would cut back on non-essentials, such as eating out, travel, clothing and movies, rather than reducing what you pay on your mortgage or electricity bill. By giving full support where your crucial functions are, much like keeping a top performer at their full wage, you increase your chances of surviving tough times.
Why Salary Freezes Don’t Work
The war for talent is still on. Don’t let the current state of the economy confuse this point. Yes, there are good, talented employees looking for work, but your competition still has their eye on your top talent. Top performers add more value to the organization than non-performers, and top performers will always be in demand. Making decisions about employee pay in bulk is never a best practice. You don’t believe in handing out across the board increases to everyone so why would you do the same thing with salary freezes?
Keep Monitoring the External Pay Market
Because of the talk of widespread salary freezes, some companies think they can stop surveying the external pay market right now. Not true. For the reasons named above, the market is still moving. Don’t let your top performer’s pay stagnate while the market moves on. Keeping current on the external market can help you ensure that your pay practices remain competitive and up-to-date with that evolving market.
What to Do When You’re Asked to Cut Costs
When it comes time to make some changes and remove the fat, a smarter move than a pay cut or salary freeze is to look at the organization as a whole, especially the organizational design and staffing. You need to find short-term savings that do not damage your chances at long-term success. Keep your long-term staffing needs in mind. Reductions or layoffs are never easy, but could be a more viable option for long-term success.
Director of Customer Service and Education at PayScale.com
Are you paying your best employees enough to retain them after the economy picks back up? Get up-to-date and make sure your external salary market data is specific enough to the education, skills set and experience of employees you want to keep. Give a PayScale demo a try.