Same job, smaller paycheck
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Motorola did it. So did FedEx. And Caterpillar and IBM and the children's clothing retailer Gymboree. They all asked their employees to keep up the good work, just for less money in return.
In the midst of the worst economic downturn in decades, more and more companies are relying on salary reductions to stay afloat.
Of course, layoffs cut the bottom line, too. But it's not easy to maintain the same workload when you have fewer people working.
"You've put a hole in the fabric, and it's harder for everyone else to make up the work that person had done, or the expertise that person held," said Amy Lindgren, who owns a career consulting firm in St. Paul and writes an employment column for the Pioneer Press.
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"If you cut everybody's pay, you have, potentially, employees who are disgruntled. Yet you are relying on them to turn out your goods and services."
Lindgren says it's nice to think employers opt for pay cuts over layoffs out of a sense of loyalty to their employees. More often, though, they're thinking of the money they'll save in the long run.
If they lay off employees in bad times, they'll just have to refill those positions in good times. And that's not cheap to do.
"The training required to get an employee up to speed is enormous," said Lindgren. "So from purely a financial point of view, the company has a lot of investment in each worker and wants to keep them on board, even though they can't really afford the worker."
Which is why pay cuts can look so tempting. Businesses get to keep all their workers but still save money.
There's just one hitch, says labor economist Dan Mitchell.
"Employees resent it," says Mitchell, a professor of management and public policy at UCLA. He says there's a reason why most companies use pay cuts only as a last resort.
"From the point of view of the employer, somebody who's laid off may resent it, but they're no longer sitting in the workplace," said Mitchell. "On the other hand, if you cut everybody's pay, you have, potentially, employees who are disgruntled, and yet you are relying on them to turn out your goods and services and so on."
Plus, says Mitchell, the company risks losing its best employees. Those workers don't exactly appreciate the perceived drop in their value, and there's a good chance they'll head right out the door when the economy improves.
But despite the risks, about 5 percent of U.S. companies have decreased compensation over the last 12 months. The employment consulting firm Watson Wyatt found that 11 percent are considering wage cuts for this year.
If you work for one of those companies, you might assume your only options are take the cut or hit the road. But Amy Lindgren says that's not entirely true.
"I like people to really negotiate for a cut in hours rather than a pay cut. With a pay cut, what you are risking is that you may or may not get back to full pay," said Lindgren. "When it's a cut in hours, the employer has skin in the game as well. When there is more work to be done, they very much need and want somebody to be back full time and they will bring you back if you can."
Lingren admits you may not always get what you ask for. And given Minnesota's current 6.9 percent unemployment rate, she knows it's natural for employees to feel lucky to simply have a job --- even if it does pay less than it did last year.
But she says it's important to remember that by taking a pay cut, you're helping the company out of a financial bind. So approach it like a partnership.
"Take care of your own career. Say to the manager, 'Yes, I can do this with you, but I need a review in three months. Review the financial situation of the department in three months to see where we're at, because I won't be able to do it forever.'"
When it comes down to it, says Lindgren, a pay cut is just a catalyst -- albeit an unpleasant one. It forces people to ask themselves the questions they really need to be answering anyway.
"What would you have done if this hadn't happened? How long were you planning to stay, what was your pathway with this company going to be?" said Lindgren. "If you have a long-term future with this company, then this is a short bump in the road -- a little thing to get through."
"But if this was a stepping stone to something else, then at the very least this accelerates your job search for the next thing you were trying to get."
