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by Erik Sorenson | May 27, 2009


I'm not sure if you've heard this yet, but apparently the U.S. Economy is in some kind of trouble.  Seriously folks - the bad news is relentless and I have lots of executive friends who think the news media is at least partly to blame for the nose-diving economy.  (Actually, some of them think the media is completely to blame, but they blame the media for everything).  Certainly the media's relentless truth-telling isn't helping … but hey, this will be the subject of another blog, another day.

Today's topic – apropos these dark and stormy times – is the emerging debate over how best to cut personnel costs as companies in virtually all sectors scramble to retrench.  Some companies have mandated across-the-board pay-cuts like Advanced Micro Devices with salary reductions of 5-15%  - Caterpillar slashing pay by 15-35% - and FedEx knocking back pay by 5-15%.

Other companies have been trying a different approach:  the furlough.  (A furlough is defined as a temporary leave of absence, and in this climate, add unpaid).   Gannett required all its employees to stay home for one week this quarter without pay while Piper Aircraft went further by requiring one week off  in April and in July.   Even the government is getting into the act, coast to coast, with California giving unpaid leave every other Friday (10% cut) for the rest of the year, while the state of New Jersey will ask workers to stay home twice between now and Memorial Day to save the state $39 million.

So, here's the question:  your company has cut discretionary costs and has laid off a group of workers, but still needs to cut more.  Your choice is between cutting pay and requiring a furlough.  What's an executive to do?  In my view, it depends on the company but in most cases the pay cut is preferable.  For the worker, the pain is disbursed evenly over the course of the year as opposed to being isolated in a particular pay period (except in the California example, which spreads out the sacrifice over all pay checks). For the company, there is no reduction in workforce output whereas the furlough creates a real loss of productivity.

An exception would be a company that has inherently "dead" periods on the calendar where productivity is lost (or diminished) anyway.  Certain companies produce cyclically and could time furloughs to match productivity requirements.  And almost all companies suffer lower productivity on Fridays and during certain weeks in the summer.

With the Economy "getting worse before it gets better" – more companies will be facing the necessity to lower payroll.  What are you going to do when the pay cut vs. furlough choice arrives on your desk?


Filed Under: Workplace Issues