When cost cutting measures are necessary, what is the best way to proceed and still maintain employee engagement and productivity? Although the reality may be that both job and pay cuts will be put in place, an ongoing debate exists about whether wage cuts should or should not be considered.

In the downturn, more organizations have chosen to reduce employee compensation than in previous years. In April of 2009, “salary reductions jumped from 7 percent in February to 21 percent” according to a Watson Wyatt survey with 141 U.S. based HR executives. Meanwhile, Challenger, Gray and Christmas Inc. reports that  “One interesting trend we have seen in this downturn is the increased use of across-the-board salary reductions. In the past, companies were more inclined to cut jobs than reduce wages, reasoning that productivity would drop and turnover increase among high-performing workers.”

With increasing acceptance of salary reductions, questions are being asked about the spin-off costs that go along with this approach. Considering, as  Elizabeth Razzi points out,  “Workers are facing years with few or no pay raises, vanishing bonuses, curtailed retirement contributions, longer hours and a heavier workload," we may be safe to assume that employees will react in unexpected ways. Compounding the situation is the possibility that changes could become permanent. Dana Mattioli writes in The Wall Street Journal “If your firm isn't clear on how long the cuts will last, experts say you should consider them permanent.”

In recent history, it seems that pay cuts were considered to be a last resort. According to BusinessWeek author Jena McGregor, “For decades, reducing salaries was anathema to managers. Employers could cut bonuses, eliminate raises, and even slash benefits, but an employee's base pay was sacrosanct.” There remain those who believe that wages should remain untouchable. Opponents contend “Some people charge 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,” writes McGregor. 

Which side of this debate do you agree with?

Do you think that pay cuts will irreversibly hurt an organizations ability to attract and retain top talent?

Is it possible that these types of cuts could change the landscape of the workplace? For example, could they drive more and more talented individuals to create their own opportunities, just like the entrepreneurs in Razzi’s article?


References:

Challenger, Gray and Christmas. “What Are Companies Doing To Cut Costs?” @work [http://challengeratworkblog.blogspot.com]. February 10, 2009.

Mattioli, Dana. “Salary Cuts: Ugly, But It Could Be Worse.” Wall Street Journal. [http://online.wsj.com]. April 9, 2009.

McGregor, Jena. “Cutting Salaries Instead of Jobs.” BusinessWeek. [www.businessweek.com]. May 28, 2009.

Razzi, Elizabeth. “The Worker’s Open Road.” The Washington Post. [www.washingtonpost.com]. May 31, 2009.

Watson Wyatt Worldwide. “Effect of the Economic Crisis on HR Programs.” [www.watsonwyatt.com]. April 2009.