Are layoffs or wage cuts better for worker morale? on clarkhoward.com

When times are tough for businesses, the economic theory of "wage stickiness" holds that it is better to lay some workers off and preserve the wages of those who remain vs. cutting everyone's wages to ensure there are no layoffs.

But some employers are experimenting with flipping that equation on its head. Instead of doing layoffs, they're cutting wages across the board and preserving the headcount.

What do you think? Be sure to vote in Clark's poll and let him know.

Executive producer Christa and associate producer Joel both agree that they'd prefer pay cuts to layoffs. Economists, however, disagree with both of them, arguing that the hit morale takes as your check shrinks is very severe. But as Christa counters, having a skeleton staff that has to do twice the work is depressing too.

We'll leave you with this very inspirational story from Clark's past: When he owned his travel agency, one of his corporate clients was in dire financial straits. The office manager at the company believed so much in the company that she went off the payroll for 2 years. She lived on her husband's salary and actually worked for free for 24 months. When the company recovered, she got her retroactive pay, plus another 50% for her loyalty!

What others are saying

Are layoffs or wage cuts better for worker morale
A sad but true parallel between our nation’s government and many companies who are fed up with its current structure and behavior

The ownership and management of many companies are quick to point out their frustration with the recent actions of our government. “How can they justify taking the profits that we work so hard to generate and GIVE it to the people who don’t contribute to the prosperity of our precious country? Since our nation’s leaders choose to cater to these delinquents, we are forced to subsidize their self destructive habits and their other non essentials and now we find ourselves in such economic turmoil that the future of our children is challenged to say the least.”

“In fact, today we find ourselves in need of making some unfavorable decisions, just to stay in business. We’ve had to cut down on bonuses and our 401K contributions and we are in the process of restructuring the medical coverage we offer to our employees. If that isn’t enough, we’ll have to force unpaid “vacations” as well as a cut back in hours. Hopefully that will at least prevent us from eliminating anyone entirely.”

In other words, if there are any employees who don’t contribute to the prosperity of these companies, the hard working employees will subsidize their behavior through various pay and benefit cuts! I would venture to say that here is a likelihood of the existence of such employees in most companies of any size. It’s the responsibility of the management in those companies to make their expectations known to all employees and then hold everyone accountable. Those who choose not to be a true contributor are recognized and dealt with accordingly before they succumb to the antics of our incompetent government. Unfortunately, the elimination of non contributors may not be enough and other actions may be inevitable, but when business is profitable once again, those companies will be in position to hire additional contributors.
By Denny @ 05/08/09 08:15:17 AMreport abuse
Pay cut or Layoffs
It's like the bailouts. Do you understand and believe in basic free market economic principles? Or do you think every stagnant inefficient operation should be allowed to continue no matter what the cost is the rest of the society and economy. Maybe you should give the automakers and AIG more money while you're at it.
By Patrick Pierce @ 03/17/09 05:28:51 AMreport abuse
Pay cut or Layoffs
Umm, yeah. Maybe most of your listeners work I'm small offices (like my wife where everyone works hard equally.) I don't. I work at a non-union (thankfully) grocery store chain and would be infuriated if instead of letting go of the people who don't pull their weight I had to take a pay cut. If everyone worked at the same performance level then I would be much more open to the idea of a pay cut, but that is not how it is in real life. And I'm not talking about people who may be incapable of the same level of work as me, like my wife who is disabled. I mean lazy or incompetent people. You have to trim the dead branches for the tree to live. Don't punish the good to provide for the bad.
By Patrick Pierce @ 03/17/09 05:19:48 AMreport abuse
Effective wage cut
After taxes (Federal, State, FICA, etc), wouldn't a 10% cut only really be about 6% take home?
By FWB @ 01/29/09 09:54:39 AMreport abuse
Company perspective
The steel company I work for has the solution to this problem in there buisness ideals. When demand for our product lowers, so do our hours, which sucks, but i have a job and insurance and benifets. Google Nucor corp if anyone is interested in knowing more about there 100% incentive pay and not ever having a single lay-off in thier decades of history. Some buisness classes even teach thier system to students.
By Brad @ 01/20/09 07:07:21 PMreport abuse
Wage cuts better!
I work in a union shop & would vote for my wages cut to keep people working. I believe most union members would also.
Greed is what got us here.It's time we all look out for 1 another.
By Jim @ 01/20/09 05:23:02 PMreport abuse
GT - 3.8%
2/52=3.8%
By drew @ 01/20/09 10:05:22 AMreport abuse
RNB--taking two weeks off is better?
RNB--have you figure out what percentage of pay you'll be losing by taking 2 weeks off in the next 6 months? It might add up to more than a 10% overall deduction...depending on your pay and such.
By GT @ 01/18/09 12:27:24 PMreport abuse
Irrational
Cutting pay to avoid a layoff ignores a very basic economic principal. If you do not pay a worker what he is worth, someone else will. Therefore you will be left with only those who can not possibly work anywhere else.
By The Southern Democrat @ 01/18/09 10:08:37 AMreport abuse
Layoffs vs paycuts
I wanted to give you a full answer to the following:
“With all the mounting job losses, Clark wants to know which option would appeal to you at work:”

In the current economic environment I think the 10% pay cut to avoid widespread company layoffs is the best answer. There are a lot of assumptions in this answer. First that the layoffs are because of the bad economic conditions and not that the business is in a dying field, or cannot compete with its peers for some other reason. Second, the owners or executives have taken a pay cut. Third, the owners or executives believe that the business will return to levels that justify keeping all of the employees. Incentive rewards should be kept in place if at all possible. If the company does not believe that business will pick back up in the next year or two, then layoffs would be the better answer.

In good economic times, layoffs are the way to go. The assumptions here are that the company cannot justify the current employment levels. This can happen to good companies when more competition enters a market. This will happen to all companies in a dying industry (buggy whip manufactures are the traditional example). This will happen to poorly run companies over time.

Each company needs to look at its unique circumstances to make the layoff/pay reduction decision. I think that too many just go straight to the layoff option without thought. Even worse, many layoff the most expensive workers. If the company was run by competent management, the most expensive workers would be the most productive workers, and therefore the last to be let go.

PS, this was written using the free OpenOffice program.
By Charles Fischer @ 01/17/09 11:43:33 AMreport abuse
Layooffs vs paycuts.
There is a third option. Time off without pay. At the company I work for, we have to take two weeks in the next six months. I loose some money, but I get two weeks off, and my salary stays the same.
By rnb @ 01/17/09 09:52:41 AMreport abuse
Layoffs vs. paycuts deja vu
I grew up with the idea that this was the kindest approach and most paternal approach for a company to take in reaction to the problem of drastically reduced revenues. Time - 1931, Central Rubber of Indianapolis called it's employees into the office for a vote on this subject. They opened their books for the employees to see; the employees voted to drop salaries. My grandfather's salary dropped from $75/week to $23/week to enable the company to retain all its then current employees.
By Dan Fisher @ 01/16/09 09:43:51 PMreport abuse

Are layoffs or wage cuts better for worker morale

A sad but true parallel between our nation’s government and many companies who are fed up with its current structure and behavior

The ownership and management of many companies are quick to point out their frustration with the recent actions of our government. “How can they justify taking the profits that we work so hard to generate and GIVE it to the people who don’t contribute to the prosperity of our precious country? Since our nation’s leaders choose to cater to these delinquents, we are forced to subsidize their self destructive habits and their other non essentials and now we find ourselves in such economic turmoil that the future of our children is challenged to say the least.”

“In fact, today we find ourselves in need of making some unfavorable decisions, just to stay in business. We’ve had to cut down on bonuses and our 401K contributions and we are in the process of restructuring the medical coverage we offer to our employees. If that isn’t enough, we’ll have to force unpaid “vacations” as well as a cut back in hours. Hopefully that will at least prevent us from eliminating anyone entirely.”

In other words, if there are any employees who don’t contribute to the prosperity of these companies, the hard working employees will subsidize their behavior through various pay and benefit cuts! I would venture to say that here is a likelihood of the existence of such employees in most companies of any size. It’s the responsibility of the management in those companies to make their expectations known to all employees and then hold everyone accountable. Those who choose not to be a true contributor are recognized and dealt with accordingly before they succumb to the antics of our incompetent government. Unfortunately, the elimination of non contributors may not be enough and other actions may be inevitable, but when business is profitable once again, those companies will be in position to hire additional contributors.

By Denny @ 05/08/09 08:15:17 AMreport abuse

Pay cut or Layoffs

It's like the bailouts. Do you understand and believe in basic free market economic principles? Or do you think every stagnant inefficient operation should be allowed to continue no matter what the cost is the rest of the society and economy. Maybe you should give the automakers and AIG more money while you're at it.

By Patrick Pierce @ 03/17/09 05:28:51 AMreport abuse

Umm, yeah. Maybe most of your listeners work I'm small offices (like my wife where everyone works hard equally.) I don't. I work at a non-union (thankfully) grocery store chain and would be infuriated if instead of letting go of the people who don't pull their weight I had to take a pay cut. If everyone worked at the same performance level then I would be much more open to the idea of a pay cut, but that is not how it is in real life. And I'm not talking about people who may be incapable of the same level of work as me, like my wife who is disabled. I mean lazy or incompetent people. You have to trim the dead branches for the tree to live. Don't punish the good to provide for the bad.

By Patrick Pierce @ 03/17/09 05:19:48 AMreport abuse

Effective wage cut

After taxes (Federal, State, FICA, etc), wouldn't a 10% cut only really be about 6% take home?

By FWB @ 01/29/09 09:54:39 AMreport abuse

Company perspective

The steel company I work for has the solution to this problem in there buisness ideals. When demand for our product lowers, so do our hours, which sucks, but i have a job and insurance and benifets. Google Nucor corp if anyone is interested in knowing more about there 100% incentive pay and not ever having a single lay-off in thier decades of history. Some buisness classes even teach thier system to students.

By Brad @ 01/20/09 07:07:21 PMreport abuse

Wage cuts better!

I work in a union shop & would vote for my wages cut to keep people working. I believe most union members would also.
Greed is what got us here.It's time we all look out for 1 another.

By Jim @ 01/20/09 05:23:02 PMreport abuse

GT - 3.8%

2/52=3.8%

By drew @ 01/20/09 10:05:22 AMreport abuse

RNB--taking two weeks off is better?

RNB--have you figure out what percentage of pay you'll be losing by taking 2 weeks off in the next 6 months? It might add up to more than a 10% overall deduction...depending on your pay and such.

By GT @ 01/18/09 12:27:24 PMreport abuse

Irrational

Cutting pay to avoid a layoff ignores a very basic economic principal. If you do not pay a worker what he is worth, someone else will. Therefore you will be left with only those who can not possibly work anywhere else.

By The Southern Democrat @ 01/18/09 10:08:37 AMreport abuse

Layoffs vs paycuts

I wanted to give you a full answer to the following:
“With all the mounting job losses, Clark wants to know which option would appeal to you at work:”

In the current economic environment I think the 10% pay cut to avoid widespread company layoffs is the best answer. There are a lot of assumptions in this answer. First that the layoffs are because of the bad economic conditions and not that the business is in a dying field, or cannot compete with its peers for some other reason. Second, the owners or executives have taken a pay cut. Third, the owners or executives believe that the business will return to levels that justify keeping all of the employees. Incentive rewards should be kept in place if at all possible. If the company does not believe that business will pick back up in the next year or two, then layoffs would be the better answer.

In good economic times, layoffs are the way to go. The assumptions here are that the company cannot justify the current employment levels. This can happen to good companies when more competition enters a market. This will happen to all companies in a dying industry (buggy whip manufactures are the traditional example). This will happen to poorly run companies over time.

Each company needs to look at its unique circumstances to make the layoff/pay reduction decision. I think that too many just go straight to the layoff option without thought. Even worse, many layoff the most expensive workers. If the company was run by competent management, the most expensive workers would be the most productive workers, and therefore the last to be let go.

PS, this was written using the free OpenOffice program.

By Charles Fischer @ 01/17/09 11:43:33 AMreport abuse

Layooffs vs paycuts.

There is a third option. Time off without pay. At the company I work for, we have to take two weeks in the next six months. I loose some money, but I get two weeks off, and my salary stays the same.

By rnb @ 01/17/09 09:52:41 AMreport abuse

Layoffs vs. paycuts deja vu

I grew up with the idea that this was the kindest approach and most paternal approach for a company to take in reaction to the problem of drastically reduced revenues. Time - 1931, Central Rubber of Indianapolis called it's employees into the office for a vote on this subject. They opened their books for the employees to see; the employees voted to drop salaries. My grandfather's salary dropped from $75/week to $23/week to enable the company to retain all its then current employees.

By Dan Fisher @ 01/16/09 09:43:51 PMreport abuse

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Jan 16, 2009 -- Are layoffs or wage cuts better for worker morale?

What others are saying