Pay cuts instead of layoffs: something insidious this way comes?

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More and more companies are cutting worker pay. I wrote a story about that a few weeks ago for the Global Business section of our magazine. I started thinking about it again last week after hearing that EMC, which makes data storage hardware, is reducing tens of thousands of salaries by 5%. The forward march continues.

At first blush, this probably seems swell, since the alternative—ostensibly—is layoffs. Companies are spreading around the pain, refusing to toss employees out on the street. It’s all very touchy-feely. Well, maybe. When I wrote that story, I made sure to insert some skepticism (though maybe not enough), noting, for example, that in many cases these pay cuts are—or become—permanent. I remarked that I hoped the recession wasn’t just a convenient cover for companies that had been looking to trim labor costs anyway.

Since then, I’ve been e-mailing back and forth with a reader about pay cuts at HP. He sent me a link to this blog post and this video, which pretty clearly show that no, workers aren’t always happy when companies “save” jobs by reducing pay. In fact, sometimes workers wind up doing things like comparing senior management to Nazis (for the record: I am not personally making that comparison). Barry Diller has also had some harsh words for executives of companies that are profitable but nonetheless cutting back on labor costs—i.e., people’s livelihoods.

That’s not to say that pay cuts are necessarily insidious. When I was talking to Truman Bewley for my story, he recalled one company where the union was trumpeting the idea of pay cuts, but management refused, afraid they’d send the signal there wasn’t enough work to do, and that employees would adjust their enthusiasm and output accordingly.

But Bewley also pointed out that in many instances pay cuts aren’t really an alternative to layoffs—that when a company needs a smaller workforce it needs a smaller workforce. Normally, he said, pay cuts only preserve jobs if demand for what the company sells is very sensitive to price. By taking out a sliver of the cost of producing its goods or services, demand rebounds. In most other cases the notion that a pay cut saves a job just isn’t accurate, he said. Which gets me back to being suspicious of why so many companies are deciding now is the time for pay cuts.