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Looking Beyond Pay Cuts And Layoffs

Forbes Human Resources Council

CEO and Cofounder of Compete, real-time market data for HR leaders, CFOs and Venture Capital Funds in tech.

Recent financial figures suggest that the U.S. economy is growing, albeit slowly. The annual inflation rate fell to 8.5% in July, down from the 40-year high it hit in June. More significantly, 528,000 jobs were added to the market over the course of the month. So, despite a general negative sentiment driven by headlines filled with news of layoffs and companies closing, there is an expectation that the economy will transition to steadier and more stable growth.

Last year, the number of small businesses in the U.S. reached 32.5 million, accounting for nearly all (99.9%) U.S. organizations. Between March 2019 and March 2020, one million companies opened while nearly 994,000 closed, resulting in a net gain of just over 42,000 businesses, according to the SBA. Yes, the number of closures does give cause for concern, especially since these small businesses account for 61.7 million employees.

Continued economic uncertainty has seen many organizations asking themselves whether to embark on cost-reduction exercises like pay cuts or something more extreme like layoffs to create breathing room if things take a turn for the worse. Since a good percentage of a company's budget is typically spent on its people, it might make sense at face value. However, salary cuts and layoffs are not always the best options.

Beware The Overcorrection

Organizations must be careful of overcorrecting when it comes to either of these interventions. There is a temptation to make too many cuts too quickly, especially when the organization does not have clear targets in place.

Invariably, cost-cutting can, at best, be seen as a short-term measure. After all, a business must still position itself for growth when the market stabilizes. Salary cuts can dramatically slow down the business and reduce the level of agility it has. This is not ideal given the need for a fast-mover advantage in a digitally driven market.

The uniqueness of the pandemic has created an environment where people and societies have been pulling together and finding ways of contributing to solutions. Pay cuts and layoffs are not ideal when maintaining this social contract between the employee and employer. Alternatives must always be prioritized, with these two measures only being implemented when all else fails.

Psychological Impact

Effectively, the organization breaches the psychological employment contract when it initiates layoffs. Those employees who leave and those who remain end up questioning whether organizations are worth their time and effort. In this situation, the remaining people may reduce their overall efforts at work.

In recent months, this has been replaced by the emergence of "quiet quitting," where people do only the amount of work necessary to not get fired while searching for a new job where their employment contract is more secure.

With so many new policies, such as unlimited vacation days and remote work, many employees view being "responsible corporate citizens" within their existing roles as an afterthought. Instead, these individuals start investing in their personal brand—rather than their work brand.

Repositioning Benefits

Decision-makers must look beyond the monetary aspects of employee benefits. After all, compensation entails not just a salary. Pre-Covid, technology companies were proud of the luxurious benefits they could offer employees, like gym memberships, beauty treatments and other perks. Of course, the cost-of-living crisis has dramatically changed the landscape.

Our survey at Compete shows that the three employee benefits deemed the most important by workers are company equity, health insurance and remote work flexibility. It comes down to making people feel appreciated, supporting their health and enabling them to provide for their families.

To bolster employee relationships in these challenging times, leaders must understand the benchmarks against which workforce productivity and efficiencies are measured. By having a North Star in place, the organization can start making smarter decisions about finding alternatives to pay cuts and layoffs.

To lead through uncertainty, leaders can look beyond pay cuts and layoffs to ensure they're properly supporting their employees.


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