November 27, 2022

small business advice

Layoffs or Salary Reductions?

Jerry Osteryoung | 2/9/2009

Action springs not from thought, but from a readiness for responsibility.
— Dietrich Bonhoeffer


As so many businesses continue to experience falling sales, you might have to consider cutting your labor expenses. However, there is no question in my mind that these should be the last expenses that you cut. Laying off workers affects the employees and their families so deeply. It does not help us turn the economy around, nor does it give you the labor supply that you need when the economy rebounds -- and I promise you that it will.

I serve on the Board of a company, and we were faced with the decision to cut labor expenses. This company has a marginally profitable division that does not add much to the bottom line and is a large distraction to management. For those reasons, we really should have closed the division down.

However, if we had closed the division, 20 staff members would have been left with little hope of finding employment in this recession. Management and the Board of Directors all agreed that keeping staff employed was the correct thing to do in this phase of the economy, even if it meant taking a small hit on earnings.

Was this a way to increase the return to the shareholders? Of course not. Rather, it was a way to be a good corporate citizen by placing the welfare of staff in a position of high importance.

Did we have the financial resources to make this happen? Barely, but we all just knew that we had a very high obligation to the staff that worked with us.

Now, all firms are not going to have the financial resources to keep staff employed after everything else has been cut. In these cases I believe that reducing pay through unpaid time off or salary reductions is a much better alternative to laying off workers. In fact, in many cases where staff members are given the opportunity to vote between layoffs and salary reductions, they almost always select salary reductions to keep everyone employed.

Between unpaid time off and salary reductions, I personally feel that unpaid time off is the best approach. By cutting back on the number of hours worked (frequently called taking a furlough), staff does not get paid, but they have the time off. There is a direct benefit from the reduced hours: more free time. They get more free time that they can spend with their family or just enjoy not working. Additionally, with this approach, the worker’s base salary is not adjusted, which means that their salary remains whole when things start to improve.

Cutting a worker’s salary, while it might be necessary, is the harsher of the two alternatives. With the exception of keeping their jobs (which is not insignificant), the salary reduction approach delivers no new benefits. There is no time off, and staff is expected to work as hard as ever but for less money. Additionally, when things start to get better, there are always questions about what the continuing salaries will be.

Now go out and make sure that you have a plan in place in case it becomes necessary to reduce your labor expenses.

You can do this!

Jerry Osteryoung is the Director of Outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran Professor of Entrepreneurship; and Professor of Finance. He was the founding Executive Director of the Jim Moran Institute and served in that position from 1995 through 2008. He can be reached by e-mail at jerry.osteryoung@gmail.com or by phone at 850-644-3372.

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