Dilemma of the Month: Cutting Employee Pay

Back Article Apr 4, 2019 By Suzanne Lucas
I’m a partner in a small business (we have three partners and seven employees). A few years ago, we went through rough financial times and cut everyone’s pay, including the partners, by 20 percent. When things improved, we raised the pay back up. Now, we’re in rough financial waters again and need to do another pay cut — and we’ll likely lose our best employees. Yet the alternative is to go out of business, putting everyone out of a job. Besides an angel investor coming in and saving us, is there anything we can do?

Well, praying for angel investors isn’t the worst idea, but I lack faith in this particular area. If you’re not profitable, getting an influx of cash will just prolong the inevitable unless you make some very real changes. So, what changes are you going to make?

This is a very important question because cutting pay didn’t solve the problems. Previously, you did cut pay the right way — some businesses make sure the leadership continues with their high salaries and bonuses while the worker bees get their wages slashed, but you cut pay across the board. As long as everyone is making at least minimum wage and is told before the pay cuts occur, it’s legal. (Remember, California has lots of local laws regarding minimum wage for employees, so double check!)

But now you’re looking at cutting wages again, and it’s doubtful your staff will be so accommodating, and you suspect your best employees will walk. They probably will, so you’ll probably lose the business anyway, regardless of a pay cut. Here are some other ideas.

Cut Headcount

This seems worse than cutting salaries, but strategic layoffs can actually be better. You’re afraid the whole business will close, which means 10 unemployed people. So, do nothing and 10 people may eventually lose their jobs, but take action to reduce your company’s headcount, and just one or two people do instead. 
This employee (or employees) would be eligible for unemployment, and you should offer severance in exchange for a general release, which makes it sound like it’s not much of a cost savings. And if it’s the person in the stockroom making $15 an hour, it’s not. But if it’s a senior person, the cost savings can be significant — even with the severance. Of course, the exact person or persons you let go will depend on business needs. Look at your numbers.

Make Your Employees Partners Too

Most small businesses don’t make the owners fabulously wealthy, but some do. This takes a tremendous amount of work. So, consider giving everyone a piece of the pie. 
This isn’t an absurd notion — lots of businesses offer stock options or grants in order to make each employee invested in the business’s success. In this case, you’ll have to offer a bit more than 1/100,000th of the business, but your employees might be willing to work a bit harder for a bit less money if they have the promise of a good payout eventually. Of course, depending on how your business is structured, this might be easier said than done. Consult with your attorney.

One of the problems with small businesses is that the owner (or in this case, the partners) are sacrificing their whole lives for the business’s success. You are willing to do anything because it’s your baby — if you succeed, you’ll reap the profits. But to your employees, it’s simply a job. And they can go out and get a 
different job. 

Go Without Pay Yourselves

Last time you gave everyone a pay cut. What if this time around you simply cut the pay for the partners? A lot.

Remember, if this business succeeds, you’ll profit. Are you willing to take no salary or 50 percent of your salary until things stabilize? If you’re not willing to take this risk, you can see why your best employees would jump ship after a 20 percent pay cut. If you don’t think that you can realistically get income back up within a year, it may be time to walk away before you go into debt (or further into debt). Sit down with an expert who can look at your business plan and your financials and help you make an informed decision.

Even if you do these things, your best employees may still leave, as they know that the chance of continued success isn’t great. Please wish them well. They’ve helped you so far, and they aren’t obligated to place their fortunes with yours. 

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