Would you like a pay cut or layoff?
Pay raises take a cut
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Tess Vigeland: Earlier we mentioned the ongoing woes of the U.S. auto industry. Well it's not just American cars facing tough times. Toyota announced last week that it's looking to cut costs. But it's trying to do so without cutting people. Instead it's trimming pay and hours. Lots of companies are looking into this option as a way to avoid layoffs. Marketplace's Jeremy Hobson reports on how organizations weigh the pros and cons.
Jeremy Hobson: If you had the choice between a pay cut of, say 10 percent, and layoffs at your company, which would you pick?
PERSON 1: I would take a pay cut, because I don't want to see anybody else go.
PERSON 2: I'd take a little pay cut. I'd feel better about myself and if I was helping out the company. But I don't know if everyone's like me.
PERSON 3: I'd prefer laying people off because I think that there are plenty of people at my firm who aren't carrying their weight.
The problem is, 39 percent of companies have already trimmed their work forces.
That's according to a recent survey by the human resources firm Watson Wyatt.
But Laura Sejen, one of the firm's practice directors, says for many companies, layoffs are only part of the story.
Laura Sejen: Either before resorting to layoffs or in addition to layoffs, companies are trying other tactics. So they're doing a hiring freeze or they're doing a salary freeze or they're putting restrictions in place on company travel.
Or they're cutting salaries. The Watson Wyatt survey found five percent of companies have already done so. A number that is expected to double in the coming year. Jo Prabhu thinks that's an understatement. She runs the recruiting firm International Services Group.
Jo Prabhu: In this current economy, there is no yardstick. Layoffs are happening daily, companies are reorganizing daily. Because there is no money, there is no credit, there is no way for them to pay their salaries.
Prabhu says just as home values were too high during the boom, some salaries were too high and now they're correcting.
Prabhu: Actually this happened to my son. His salary was being cut by 15 percent, and he asked me to look for other positions for him. But the fact of the matter is I advised him to stay within his current job because the possibility of him getting another job with the same or higher salary is almost slim to none.
The choice between layoffs and pay cuts isn't easy for managers either. Some see layoffs as better for morale, because everyone affected is gone. Psychologist Ken DeMeuse has been studying the workplace for decades. He says layoffs can lead to stress and guilt for employees who stick around. That means reduced productivity and higher health care costs for the company. DeMeuse says cutting pay means everyone feels the pain.
Ken DeMeuse: But it does tend to foster, how can we work together to save our company, to save our jobs, rather than creating a situation of haves and have nots.
Demeuse says research shows that for a pay cut to work, it's got to happen from top to bottom. Executives have to share in the pain.
DeMeuse: Secondly, there has to be a communication that it's temporary. That once the economy turns around, that your pay will be brought back to the level it once was and hopefully increased. Because you've shown good faith to stay with this company and now we're going to compensate you accordingly.
Whatever the payoff is in the future, experts say all Americans should brace for the possibility of salary cuts. Because right now, it's definitely an employer's market.
In New York, I'm Jeremy Hobson for Marketplace.