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Taking a Salary Cut

This article was written by in Career and Work. 10 comments.


In the midst of the recession, more than a few corporate executives made the difficult choice to cut their employees’ salaries. Companies whose profits depended on the health of the economy might have been at risk for bankruptcy if unable to cut costs. Reluctant to lay off employees, many troubled companies convinced the employees that the cuts were the best way to share responsibility for allowing the companies to survive the economic downturn as unscathed as possible. Company loyalty and faith was the new cult, the new nationalism. Stick by your company in difficult times.

And with unemployment levels so high, many employees couldn’t leave, even if they wanted to. A salary cut may be bad, but it’s better than being unemployed.

I’ve heard stories of a non-profit organization where, even in times of overall economic exuberance, the company’s cash flow was in such a sorry state that employees didn’t get paid. There was no cash for the payroll, and no bank would extend credit. The problems came back with the recession, and salary cuts were necessary. The CEO looked towards the example of Howard W. Lutnick, the much maligned CEO of Cantor Fitzgerald.

Twin Towers, World Trade CenterAfter the September 11, 2001 disaster, the financial firm Cantor Fitzgerald was left with only a small fraction of its employees. Rather than allowing the company to disappear, Lutnick aggressively worked to rebuild his organization. Part of his plan was to immediately stop salaries for the families of those who perished in the terrorist attacks. Lutnick became one of the most hated men on Wall Street, according to the New York Times.

The difference between Lutnick and the non-profit CEO who wants to cut salaries is that on Wall Street, the salaries were replaced with a promise of a 25% profit distribution to families each year for the following five years. The families didn’t have faith that the company would survive, but in hindsight it was a good bet to take. In total, the families received more than they would have received if they continued to receive salaries. The key here is that Lutnick offered something in replace of the salaries, even if it was a risky bet.

While Lutnick is viewed as a genius by CEOs who want to lower salaries in hard times, these CEOs aren’t offering much in the way of a replacement other than the continuation of employment — and even that is not guaranteed. This is even worse with smaller organizations, particularly non-profits, that have nothing to promise.

Non-profit organizations often count on employees believing in the mission rather than being motivated by money. Salaries are generally lower than they are for equivalent jobs in the private sector, so working in non-profit requires some acceptance that income opportunities are somewhat limited. From my experience in non-profit work, I could see I was in the minority. Many co-workers came from families where money was not a consideration; there was enough of it such that a salary at a non-profit job wasn’t even worth negotiating. Some married a rich spouse, some had family money, and others just lived with their parents. When the bulk of an organization’s employees are not concerned about salaries, the executives are not concerned, either.

If no one in the organization is motivated by financial compensation, it creates a culture where executives can get away with anything. For those in the minority who need to earn money to pay rent, buy food, and transport themselves without use of a company-owned vehicle, the question is whether the company’s mission is worth the possibility of being financially destitute.

This is much different than Cantor Fitzgerald’s Lutnick asking his community to make a financial sacrifice in return for a potential financial reward.

Have you every taken a salary cut for the same job — or for an increase in responsibilities? How did it work out?

Photo: Yutaka Tsutano
New York Times

Published or updated September 4, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Kevin @ Thousandaire.com

Call me crazy, but if I had a job where I knew my salary was inflated and I also knew the company was in financial trouble, I would try to negotiate a lower salary in exchange for guaranteed employment. A company’s first objective is profitability, and if I know they wont be profitable while they are paying me a lot, I may want to be proactive.

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avatar Luke Landes ♦127,386 (Platinum)

OK, Crazy. :-) That’s quite magnanimous of you. And if you didn’t believe your salary was inflated? And if your company were so large that one person’s salary had a minuscule effect on the company’s profitability?

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avatar Kevin @ Thousandaire.com

If I didn’t think my salary was inflated, I wouldn’t offer. And I do work at a company so big that my individual salary doesn’t matter to the whole company, but it does matter to my director’s budget, which I assume is the case in almost any huge corporation.

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avatar Luke Landes ♦127,386 (Platinum)

Excellent point.

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avatar shellye ♦107 (Cent)

I’ve never had to take a salary cut directly, but I have had someone else’s duties dumped on me after they were fired or quit, and the boss chose not to replace that position. I am curious about the Cantor Fitzgerald thing; I remember vaguely the story of the deceased employees’ salaries being eliminated. Did the surviving spouses have a choice to accept the 25% profit sharing? Did some keep the salary and pass on the profit sharing? Or did they have to accept it across the board? Seems like it would have been hugely stressful to have lost a spouse during the worst attack on America in it’s history, PLUS have to decide which would be a better deal for your future – a salary or profit sharing.

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avatar Luke Landes ♦127,386 (Platinum)

From what I understand from reading about it — I don’t know from personal experience — this wasn’t an option. I’m sure a family could say no to the profit sharing if they really wanted to, but that would mean they would have received nothing — no salary, no profit sharing.

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avatar Sean

My wife and I both work at NPOs (her with developmentally disabled adults, me with children) and after about seven years employment and becoming mid-level supervisors we both make around 30k. While we haven’t had to take pay cuts usually the only raises we receive are COLAs which run about 1 to 2% less than inflation. Additional responsibilities usually come courtesy of government regulation. My organization is much friendlier to employees than hers and as noted in the article while there isn’t a financial motivation per se the low salaries and effective pay cuts do wear thin. Employee turnover is extremely high and burnout is common. Many employees aren’t aware of how inflation and COLA works and so it ends up being a hidden way to cut salaries (the way the orgs are paid usually have inflation increases built in). The upshot, if you can call it that, is that most employees don’t have a high standard of living and therefore aren’t hugely concerned with money. Neither my wife nor I have families with any money (her mother was on welfare for most of her life), and we pay our own bills and mortgage. I did come from a higher paying job in banking prior to entering NPOs fwiw.

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avatar Ed

I think there are different concerns when it comes to this situation.

If you work in a place such as a nonprofit, there are plenty of reasons why those people do not get hurt. Most of those workers are altruistic and are not doing the work for money. They are more willing to contribute to the mission of the organization.

In for profit organizations, most are less willing to take pay cuts. For the organizations I have worked with, I would not have taken a pay cut. One organization I worked for started throwing me more and more work without giving me a pay increase. It really hurt my morale and left because I ended up ill to the point of near death several months later. By then, I had planned to leave the organization for grad school. If I had been asked at any point, I would have asked them to let me go, because I was doing work that would have earned me more almost anywhere and the fact that I had outgrown the position.

For those companies who have cut payrolls and their business improve, if they do not offer raises as soon as possible, they will see larger levels of disloyalty. Sad part for those companies is that their time is coming.

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avatar tigernicole86 ♦55 (Newbie)

I had the hourly wage cut down by $1 so that we could “keep” one of our employees. It turns out that they wanted to promote one of the supervisors while we were told that without the pay cut, her job would be rendered useless. After cutting it $1 then another 50 cents, they told us they had been a little overzealous and have us back 11 cents per hour. I’ve since left the company and while I’m sad that my co-workers wages have been lowered again, I’m glad that I’m make nearly double for only half the work.

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avatar qixx ♦1,825 (Half-Dollar)

I worked at a non-profit that actually gave more generous increases (based on percent of pay) than at my current employ. Total pay was lower so increases were not as many dollars even with the larger percentage. Everyone had a fundraising component and if you increased funds raised over previous years you were almost guaranteed a pay raise. Their you were raising funds the last few months of this year for spending next so this years budget would not be impacted.

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