As the economy worsens, and the economic slump deepens and broadens, many of my clients are faced with difficult choices about how to survive. I am getting daily calls from executives searching for ways to trim costs. Many are turning to layoffs or salary cuts, or both. Tough times require tough measures, and I suspect things are going to get worse before they get better.
But survival requires more than merely trimming expenses. Sure getting costs under control is important, but after that is done, what then? Employees who remain on the job must continue to be motivated to perform at their best -- a difficult task when they are fearful, nervous and depressed.
What they need most is hope, optimism, and confidence. But it is precisely at times like these, when it is needed most, that motivation goes out the window. It is easy to motivate employees during good times, but how can we do it now? How can companies avoid the debilitating paralysis that besets employees who are fearful of losing their job or experiencing additional pay cuts? The malaise that sets in at times like these can make a bad situation much worse.
I believe the answer can be summarized in two words -- fairness and incentives. Allow me to explain.
When it comes to cutting salaries, the principal of fairness is paramount. I too often see employers playing favorites and cutting some individuals pay more than others. They cite a range of reasons and excuses, but at the end of the day these fall on deaf ears and are perceived by employees as little more than favoritism. When it is time to make cuts, I favor the percentage (not the flat dollar approach). The reason is consistent with (but opposite to) my recent argument for base salary increases (see A New Slant On An Old Type Of Pay Discrimination); Flat dollar decreases are a non-starter because they disadvantage lower-paid employees.
Incentives, because they are self-funding and tied to measurable outcomes, are a great way to replace lost earnings from salary cuts. The worst thing you can do when cutting salaries is offer no hope or specific time-frame for replacing lost earnings. Yet managers and business owners are loathe to make promises in shaky times such as these. So employees are left hanging and demoralized at precisely the time you need the most from them.
It is essential to offer employees better direction that just "work harder." During times like these, effective leaders understand the importance of clarifying for employees exactly what they need to do to contribute to the company's success. Incentives are perhaps management's best tool for creating this clarity. Without them, employees can be left wandering in a fog and waiting to be fired.
THE PERFECT PAY PLAN
Based on numerous recent meetings with business owners and executives, I am more convinced than ever that developing goals and implementing incentives will be key to surviving and thriving in these exceptional economic times. This is because goals will help focus executives and staff on critical business outcomes, and incentives will allow you to flex your costs and pay only when you get results.
In fact, I am strongly urging my clients to freeze base salaries this year (or even implement across-the-board salary cuts) to make their business more competitive. But the trick is to replace lost (or frozen) salaries with incentives so employees remain motivated to perform. Instead of seeing this down turn simply as an obstacle, I see it as a golden opportunity to do something that is nearly impossible to do in good times – namely, shift the mix of pay from fixed base salaries toward variable pay. Many companies have wanted to do this for a long time but resisted for various reasons. Now is the time to consider taking this action which will put your business on a more solid footing for future growth.
I believe the best approach would be for all employees to take a 10% to 15% pay cut. This would provide immediate cost relief to the business and is an amount large enough to make a difference and small enough to be survivable by employees. I would then structure incentive plans for every employee tied to company, team and individual outcomes that are measurable and related directly to the near-term and long-term financial success of the business. I would set the Threshold payout at 5% of salary, the Target at 10% and the Outstanding at 15%. In this way, employees could re-earn all the money they lost in salary cuts if both they and the Company have a successful year. I would make sure that goals were realistic and achievable given the current business outlook, and be certain that owners and shareholders benefit from the results as much or more than employees (which is accomplished through careful goal-setting).
This approach not only gives employees the opportunity to earn back an amount as large (or larger) that what has been taken away, but it has the added benefit of positioning the company very well for the recovery. Rather than build back to original salary levels, I would hold the line on salary increases and instead transfer more and more money into the variable pay (incentive) plan. In that way, your company we will be in good shape for the next recession which, as we all know, will appear not long after the current one fades away.