Pay Cuts: Taking One for the Team

by | May 22, 2009

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The squeeze is on.  With the economy in a deep sleep, private and public institutions are cutting costs with a vengeance.  Companies have closed plants, dropped less profitable product lines, laid off workers, sliced benefit programs and installed furlough programs.  Similarly, states, municipalities, and school districts have grappled with all manner of cost cutting and now – more than a year into this miserable cycle – everyone is hitting bone.  The fat was gone before 2009 dawned and we’ve been hacking at muscle all quarter.


With nowhere else to cut, companies are turning to their surviving workforce and asking for (or mandating) salary cuts.  The venerable New York Times announced a temporary 5% pay cut for non-union workers and requested its unions accept the same.  (If the unions say no, the company said there would be more layoffs.)  FedEx was one of the first Fortune 1000 companies to cut pay and dozens have followed suit.  It now seems to be high season for pay cuts.

Rumors swirled in the blogosphere that NBC-Universal was asking some employees to voluntarily forego contractual increases in salary.  While no contracted employee would be legally obligated to accede to such a request, one can imagine management having a long memory about who was willing to “take one for the team” and who wasn’t.  And that – obviously – could affect negotiations when the current contract expires down the road. 

What is fair?   It is certainly fairer to ask employees to take a pay cut if the company is losing money versus a company that is profitable.  Employees are probably less supportive of companies that are profitable, but are committed to increasing profitability.  Ironies abound, especially in the public sector.  If a public company doesn’t grow, the markets will punish its stock price and the same employee who would complain about a pay cut would also complain about a drop in his portfolio value or 401k plan.  Private companies don’t have quite the same time pressure or scrutiny, but do rise and fall under the same capitalistic framework. 

Once a company has made maximum use of discretionary cost cuts and has scaled back operations to maximum effect, it is better to deploy pay cuts to keep as many valuable workers as possible.  If you are at that point as a manager or executive, it’s critical that you and other managers take the same medicine you are forced to dole out to employees.  Cuts have to be across-the-board.  Obviously the more highly paid the employee or executive, the bigger the cut – but the fairness is in the proportionality.  Also, the pay cut should be seen as temporary since it has been caused by what we all hope will be a temporary drop in revenues to be repaired when the economy starts to recover.   Finally, it’s helpful to give as much notice as possible since so many employees live paycheck to paycheck and might need to make adjustments to stay above water at home. 

Filed Under: Workplace Issues

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