With Oregon as the 2nd highest unemployment in the nation, the lingering economic downturn raises an important question for businesses and workers: is it better to cut hours and salaries instead of jobs?
According to a recent Business Roundtable survey, 71% of CEOs plan more layoffs in the next six months. However, as an alternative to laying off workers, many organizations are choosing to reduce or freeze salaries. Most have made larger cuts for senior executives and smaller ones for workers. According to a recent Hewitt survey, some 16% of companies in a study of 518 large U.S. employers have made base salary reductions during this recession, and another 21% say they are considering one. During the 2001-02 downturn, the number was so marginal that Hewitt didn’t even publish the results.
In past downturns, many organizations have been hesitant to cut salaries because of the perceived negative impact on morale and productivity among workers. However, in the current recession, many employers are arguing that it is better to take a pay cut and keep your job than it is to not take a pay cut and possibly lose your job.
However, pay cuts can have unintended consequences with regard to retaining top talent. Since top performers generally have more choices, they may choose to leave their current employer for a better offer elsewhere, thus resulting in retention problems once the economy recovers. There is also the risk that if too many companies cut wages, it would feed deflation, thus weakening the economy further.
And for workers, there is the possibility that the cuts in wages and hours that they agreed to as temporary, emergency measures could become permanent, thus causing distrust and resentment down the road.
According to a recent Business Week article, some people are charging that cutting pay can amount to little more than cowardice. Instead of making tough decisions about whom to reward and whom to fire, some companies are inflicting the same pain on everyone.
For the time being, most workers may be willing to accept a shrinking paycheck as long as they are able to keep their job. The key is to make sure top performers still earn more than their lesser-performing co-workers, even after a pay cut.