Layoffs or Pay Cuts: How would you decide?

What would you do if you were faced with having to cut payroll costs by 10% to survive in today’s tough business environment?  Would you eliminate 10% of your workforce, or would you have everyone in the company take a 10% pay cut?  That’s the choice that many companies are facing today.

The Ken Blanchard Companies faced this question (as many other companies did) in the aftermath of the 9/11 attacks back in 2001.  In our case, we lost $1.5 million that month. To have any chance of ending the fiscal year in the black, the company would have to cut about $350,000 a month in expenses.

One of the leaders suggested that the staffing level be cut by at least 10 percent to stem the losses and help get the company get back in the black—a typical response in most companies. After all lot of discussion, we ended up deciding to have everybody take a salary cut, except for people making under $50,000. In the end, this strategy worked well for us.  We pulled together, managed costs, and after things bounced back, we were able to put together a string of some our best sales years.

It made me wonder why more companies don’t use the same strategy instead of resorting to layoffs.  In searching the web, I found that there are two camps beginning to develop.  One is suggesting that layoffs are the answer, while the other is recommending that pay cuts across the board are the better response.

Surprisingly, both camps point to the negative impact on turnover, morale, and productivity that the opposing choice will cause.

For example, in the layoff camp, proponents like economist Arnold Kling of George Mason University argue that when you cut pay for everyone across the board, you risk losing your best people first. If you are going to lose people, he argues, wouldn’t it be better to lose low performers instead of high performers? 

In this same camp, other economists like Yale’s Truman Bewley explain that “The advantage of layoffs over pay reduction was that they ‘get the misery out the door.’ “

In the other camp, you have organizations who believe that every job is worth saving, and who do not want to break up groups that have worked together for a long time and that have developed emotional bonds.  For these groups the impact of layoffs will only create a break in trust and leave the remaining members of the company with “survivor’s guilt.”  In this camp, people believe that spreading the sacrifice over the entire organization is the better option.

In the end it seems like the deciding factor may be the type of culture present in your organization. Some organizational cultures are more of the “we’re in this together” while others have developed more of a “Sorry, but business is business” type of attitude.

Which way would you decide if you had to choose?  Which camp best typifies your organization’s approach to cutting costs? 

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