Sacrificing pay: a poor solution

Asking employees to sacrifice pay is a poor solution to allow a company to survive, says Jaap Paauwe. There are plenty of alternatives.

Image: © Nationale Beeldbank

Companies in distress sometimes ask their employees to sacrifice part of their salaries to help the company survive and maintain employment.

In the past, PostNL has campaigned for this. A more recent example is the department store V&D. Several consulting firms also tried to secure their survival in that way during the last recession. In fact, all of them are poor proposals.

First, it is bad for the very employees; they themselves will in fact be poorer. Moreover, it is not very realistic to ask employees with an average salary or lower to sacrifice part of their income. They desperately need every euro. But it is also a poor proposal for the company. It is the kind of last minute solution that demonstrates that the company poorly anticipated changes in market conditions. Could disappointing sales and declining prices not have been anticipated earlier with the proper response of innovation, product development, changes in distribution channels, logistics, exploration of new markets, distribution channels, etc.? Or could the company’s leadership not have had creative solutions for the salary costs much earlier?

The installation company where I was working at the time, abolished its fixed profit sharing scheme in time and replaced it with a variable profit-sharing scheme which fluctuated between 0 and 8%. Therefore, in good times, all employees received a thirteenth month of pay and in tough economic times we could reduce our prices by as much as 8%.

And what about the arsenal of holidays and shorter working hours? You can also ask your employees to contribute through them without reducing their pay. Instead of asking them to sacrifice pay, employees can also contribute by simply working more for the same pay. Not a big sacrifice based on the number of vacation days that most employees have, but effective for the company. After all, it leads to lower labor costs per hour worked.

Another alternative is to work with a flexible layer of employees. This idea dates back to the 1970-80s, but has not lost any of its effectiveness. Look at Scania’s assembly plant in Zwolle, which operates in an extremely cyclically sensitive market, but with a great need for qualified personnel. They have been working for years with a flexible layer of employees, who – just as employees with permanent contracts – are trained and paid well, but who you can shed quickly when the situation requires it. It has the added benefit that when Scania is growing and needs new employees to replace those leaving because of natural attrition each year, it can select several people from this pool of flexible workers to join the core group.

Basically, there are plenty of solutions without having to resort to salary sacrifices.

Professor Jaap Paauwe is Academic Director of the TIAS Advanced Human Resources Program.. 

This article was republished with permission of the editor from P&Oactueel, www.penoactueel.nl.