Dilemma of the Month: Cutting Employee Pay

Back Q&A 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. 


Jenny Boxer (not verified)April 18, 2019 - 7:20am

Many years ago, my firm went through hard times, and the owners took a major pay cut. We also laid off two underperformers. While wages are frozen for a while, the rest of us were unaffected. In good times, the owners earn substantially more than the rest of us (enormous bonusses). With the exception of the CEO, they don't work harder or longer hours. I hired most of them out of college years ago. Were we to have another downturn, I would again expect (only) them to take a pay cut. Your advice was right on.

Elisa Adam (not verified)April 18, 2019 - 10:56am

I'd go with option 1, and rehire at the lower wage, combined with number 3.
But that's not all I'd look at. Since you have now two instances that have brought you to the same conditions, you have an opportunity to take a look back at the cause and effect.
Sometimes, the profit heights and dips are caused by things we did or didn't notice.
Other times, those are indicators of natural "seasons" that will be a permanent pattern in what product or service we are providing.
If you can properly identify that, you can plan and structure your costs accordingly, make adjustments, innovate new ideas based on seasons. If we know when spring arrives, we can plan for winter.
In the immediate, the question is what honor and DUTY will lead to right outcome?
In order for anything to last, it must be cultivated and nurtured. Keep your best employees so you are not weakened.
These are decisions where emotions and feelings are not the best leaders. Compassion is like the herd of wild horses: a mare foaled, but the foal was too weak and could not stand up. The other mares felt sorry and tried to get the foal to stand up, but he was born with something wrong with him. The head stallion noticed predators were already gathering, a few vultures were circling and announcing the news to all the rest. He stomped the foal's head and took his herd to another pasture in another location, saving his herd.
You're going to have to choose your priorities and what is most valuable in the same manner.