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Last Updated : May 25, 2020 07:07 PM IST | Source: New York Times

Coronavirus pandemic | Pay cuts become a tool for some companies to avoid layoffs

‘Shared sacrifice’ in the white-collar ranks aims to avoid the cost of staffing up again. With no end to the crisis in sight, it is a leap of faith

New York Times @moneycontrolcom

It was late and Martin A Kits van Heyningen feared he was letting the team down at the company he co-founded, KVH Industries. Rather than lay off workers in response to the coronavirus pandemic, he had decided to cut salaries, and when he emailed a video explaining his decision at 3 am last month, he was prepared for a barrage of complaints.

Instead, he woke to an outpouring of support from employees that left him elated.


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“It was one of the hardest things I’ve done, but it turned out to be the best day of my life at work,” said Kits van Heyningen. “I was trying to keep their morale up. Instead, they kept my morale up.”

Even as American employers let tens of millions of workers go, some companies are choosing a different path. By instituting across-the-board salary reductions, especially at senior levels, they have avoided layoffs.

The ranks of those forgoing job cuts and furloughs include major employers like HCA Healthcare, a hospital chain, and Aon, a London-based global professional services firm with a regional headquarters in Chicago. Chemours, a specialty chemical maker in Wilmington, Delaware, cut pay by 30 percent for senior management and preserved jobs. Others that managed to avoid layoffs include smaller companies like KVH, a maker of mobile connectivity and navigation systems that employs 600 globally and is based in Middletown, Rhode Island.

The trend is a reversal of traditional management theory, which held that salaries were sacred and it was better to cut positions and dismiss a limited number of workers than to lower pay for everyone during downturns.

There is often a genuine desire to protect employees, but long-term financial interests are a major consideration as well, said Donald Delves, a compensation expert with Willis Towers Watson.

“A lot has happened in the last 10 years,” Delves said. “Companies learned the hard way that once you lay off a bunch of people, it’s expensive and time-consuming to hire them back. Employees are not interchangeable.”

A recent study by The Conference Board with Semler Brossy, an executive compensation research firm, and Esgauge, a data analytics firm, found that 537 public companies had cut pay of senior management since the crisis began. The study did not specify whether any had also cut jobs, however.

To be sure, if the crisis lasts longer than expected and the economy keeps shrinking, it is possible these salary reductions will not be enough to stave off job cuts. Other large corporations have cut salaries as well as jobs to stem coronavirus-related losses.

Still, the sudden nature of the economic threat has created a different mind-set among some managers than existed during the last recession, Delves said. Some companies did try to cut pay rather than jobs back then, but the impulse seems more widespread now.

“What we’re seeing this time around is more of a sense of shared sacrifice and shared pain,” he added.

When the pandemic hit, HCA was increasing revenue and adding employees, said its Chief Executive, Sam Hazen, “and to put them out on the street because of some virus just wasn’t something I was going to do.”

With stay-at-home orders covering much of the country and bans on elective surgery in many states, HCA’s hospitals were left with a revenue shortfall. The company suspended its share repurchases and quarterly dividend to bolster its financial position, and it reduced capital spending.

Hazen donated his salary for April and May to an internal fund for employees in distress, while senior management took a 30 percent pay cut. White-collar employees at lower levels saw their compensation reduced by 10 percent to 20 percent.

All in all, about 15,000 employees were affected, out of a total of 275,000. The company does not expect the pay reductions to extend beyond June.

HCA also created a pandemic pay programme that allowed more than 120,000 non-executive hospital employees to receive 70 percent of what they earned before the virus hit. Employees, including union members, are also being asked to forgo a raise this year.

“We needed our people to have as much peace of mind as possible,” Hazen said. “Our culture is centered on taking care of our employees. This is an opportunity to further differentiate our culture with our people and with our communities.”

Certainly, for chief executives and the highest-ranking officers, salary cuts are not as painful as it would first appear. That’s because for most, the bulk of their compensation comes in stock awards, said Amit Batish, Manager of Content and Communications for Equilar, a private research firm that tracks executive pay.

“Salaries are a drop in the bucket for most executives, but it does send the message that we are helping out the organisation,” he said.

Still, the fact that a few companies were able to avoid layoffs by reducing salaries raises the question of whether more businesses could have averted job cuts in the last two months.

With government unemployment benefits available for laid-off workers, many US companies were quick to cut their workforces, said Kathryn Neel, a managing Director at Semler Brossy. “In European countries, where wages were subsidised, they managed to keep more people on the payroll,” she added.

At KVH Industries, Ronda Vye was not demoralised by the pay cut — she was relieved. Although her 10 percent salary reduction hurts, said Vye, a director of digital marketing, “it’s manageable and everyone is thankful to know they have a job.”

“I’d much rather take a pay cut than see one of my fellow employees lose a job, especially in this economic environment,” she added. “Where are they going to find work?

Vye said she did not know how long the cut would last but had told her team it could extend through the end of the year.

KVH is a fraction of the size of Aon or HCA, but Kits van Heyningen employed a tiered system for the salary reductions at his company. Senior managers took a 15 percent to 25 percent pay cut, while lower-level employees faced a 10 percent trim. Employees earning less than $50,000 were spared any reduction.

“We’d never done a pay cut before,” said Kits van Heyningen, who started the company in his parents’ basement more than three decades ago. “A lot of people thought it would be a huge hit to morale.”

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When the initial responses poured in the morning after he emailed the video, Kits van Heyningen said he felt like George Bailey in “It’s a Wonderful Life,” the 1946 film in which the town of Bedford Falls comes together to support the Jimmy Stewart character and his bank, Bailey Bros Building & Loan.

In this case, the employees were coming together to support KVH — and one another. “I had hundreds of emails,” he said. “Workers earning less than $50,000 were asking if they could participate. People really feel like they are in it together.”

c.2020 The New York Times Company

First Published on May 25, 2020 05:57 pm