Let top management set an example for pay cuts

Source: De Tijd (26/03/2020); Author: Xavier Baeten, Professor of Reward & Sustainability at Vlerick Business School

Applying pay cuts in the form of temporary unemployment measures is a good idea. However, we should not underestimate the negative effect they have on attitudes to work. It helps if employees trust management, but managers do need to set the right example.

It was striking that when social distancing was first introduced, companies were most preoccupied with the idea of working from home. Some had always resisted the concept – due to an unnecessary lack of trust in their staff – and are now finding themselves forced to use it anyway. Other, more enlightened companies organised their important ‘coffee-break chats’ digitally to ensure that social distancing didn’t turn into social isolation. In fact, the latest trend is getting together for drinks online.
It is becoming increasingly clear that the coronavirus crisis is having an impact – if only a temporary one – on our employees’ pay. We are feeling the pinch even more because we need our salaries to meet our basic needs, the lowest level of Maslow’s famous hierarchy of needs. That makes this crisis fundamentally different from the one in 2008. Back then, only 0.9% of Belgian companies indicated that a reduction in basic pay was a significant part of their strategy for saving costs. Now companies are applying the temporary unemployment system en masse, which involves the government providing benefits equivalent to 70% of a capped income. In the 2008 crisis, only 0.9% of Belgian companies indicated that a reduction in basic pay was a significant part of their strategy for saving costs.

The government deserves a pat on the back for this system, which makes Belgium a pioneer. It gives our companies the possibility to be flexible with wage costs, in order to cope with economic shocks – hopefully brief ones. Furthermore, the employer can add supplements without triggering prohibitive taxes and other charges. The policy report (in Dutch) on the use of temporary unemployment by Struyven, Van Waeyenberg and Vandekerckhove does propose a few ways to improve the system, but it also demonstrates that the system responds to the goal of keeping employees on board.

We are still waiting for the figures that will answer questions on, among other things, the extent of the differences between categories of workers for temporary unemployment, the extent to which ‘part-time’ temporary unemployment is being applied and the extent to which companies top up their employees’ pay to compensate for the loss of income.

Salary solidarity

A form of ‘salary solidarity’ has been cropping up over the last few days. Day after day, CEOs, top managers and directors from around the world have been announcing that they too are making sacrifices. Practices are varied: the CEO of the Marriott hotel chain will not be receiving a salary until the end of 2020 and the salaries of his colleagues in the executive team are being halved. Many CEOs are giving up their entire salaries until the end of June, with others relinquishing 10 to 25 per cent. Some companies have written off their entire bonus plan for 2020.

But is a ‘pay cut’ in the form of temporary unemployment and a similar arrangement for managers a good idea? In theory it is, because, as the temporary unemployment system has shown, it enables people to keep their jobs, which is a good thing in both the short and long term. What is more, it may be a cruel necessity in companies where the inflow of cash has dried up and at least half the costs are for salaries.

However, pay cuts also have a psychological impact. Research has shown that they have a negative impact on attitudes to work and may lead to theft. A pay cut gets to people. The emotional charge of a salary is often underestimated.

At the same time, it has been demonstrated that the negative impact is greatly reduced if there is trust in management: if employees are informed about the company honestly and in good time, and if they are actively consulted when decisions are made.
The old adage applies here as well: a burden shared is a burden halved. In that respect, top management should set an example, and the burden should be lightest for those who earn the least.

So look before you leap when it comes to cutting pay. And if you do it, be smart about how you do it.

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