Modifying Pay

“Modifying pay” has the potential for significantly impacting your workplace culture. If you’re considering reducing pay to your employees as an alternative to layoffs, you should carefully review all of the ramifications. These include how a pay rate reduction would influence:
  • Your workplace morale, and hence, employee productivity
  • The possibility that your best people will take another job elsewhere
The impact of a pay modification will no doubt be heavily influenced by your company’s culture. For example, if you have a relatively small number of employees who understand that a cut in pay is a last-resort step to keeping your business in business, they’ll probably be far more willing to make the sacrifice to save the business – and their jobs. And of course, this kind of sacrifice goes down far more easily if you, along with your senior management, are also willing to take on a similar level of austerity.
Reduction in pay can be a better step for your business in the long term. According to Wharton Business School professor Peter Cappelli, firms that are doing layoffs are in trouble. In fact, staff members at the school recommend shifting focus away from layoffs when hard times hit. Wharton management professor John Kimberly suggests companies resort to creative strategies instead of laying off employees. Finding alternatives to a layoff can foster greater loyalty, which pays off for companies in the long run.
Under federal law, you can reduce your hourly employees’ pay rate if you continue to adhere to minimum wage standards. As discussed in the previous section, a wage cut for a salaried employee may impact their exempt status, so make sure you know where you – and they – stand in this regard.

Game Plan

  • Before instituting any kind of layoff or layoff alternative, Wharton Business School professors recommend considering all your options.  This article provides some interesting perspectives.
  • Some states require advance written notice of pay cuts to employees. Be sure to contact your state department of labor to familiarize yourself with laws that may apply in your jurisdiction.
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