Wages cut vs Employees lay off, and Alternatives

In a study published in 2018 entitled “Analyzing the Aftermath of a Compensation Reduction” researchers found that if companies cut wages due to crises, the most productive employees would leave to look for better opportunities with competitors, while the less productive employees (who can’t get any other opportunities) would remain, which causes a great loss to the company, so the best choice for companies in crisis is to lay off the least productive employees instead of wage cuts,

But what other alternatives are there? How can you restructure a company that has gotten into trouble while preserving all jobs? We present seven proven alternatives.

If the company is threatened with serious economic damage, salary cuts are legal. It is important here:
• The cuts must not be arbitrary. All employees should be affected to a similar extent.
• Clearly communicate the negotiation of new salary structures with your employees as an alternative to resignation, but without threatening a pay cut.
• Obtain the consent of the employees, in no case keep salaries without a mutually agreed adjustment of the employment contract.

Salary cuts can also be combined with reduced working hours or job sharing, in which two jobs are combined into one and filled part-time by two workers. You may also be able to cut part of the salary and replace it with tax-free benefits in kind, such as fuel vouchers.

Offer older employees early retirement. These employees often benefit from salary structures that were negotiated in times of different economic circumstances or that have grown over the years with the company. If they retire before the end of their employment contract, you can hire employees at a lower salary level. For the employee who retires early, however, this results in lower pension rates. The question of a corresponding severance payment may arise.

An alternative to early retirement is partial retirement, in which employees reduce their working hours to 50% before they retire. This eliminates part of the wage costs, but of course the availability of the employees is also reduced.

You can offer an employee buy-out to bind employees to the company in the long term, to strengthen their identification with the company and to boost productivity. Employees buy shares in the company. With direct transfer, salaries can be converted in whole or in part into company shares, which then become permanent property of the employees. The company saves wage costs in this way and the burden of taxes and social security contributions is reduced for the employees. If a short injection of funds from outside capital is required, employees can grant the company an employee loan. By mutual agreement, the employer withholds part of the salary and pays it back at a later date plus an interest rate that depends on the profit or turnover of the company.

If certain jobs, positions or departments are eliminated in the future, the employees concerned can be retrained and cover other jobs in the future. There may be related areas of application that require little training - for example, when maintenance workers can switch to production or assembly. Are new positions or departments created in return? Then think about which employees have the right skillsets for a change and what support you can use to prepare employees for a new area of ??work who have not yet gained the relevant experience.
This alternative requires a long-term perspective and a timely look into the future. The right time to implement this strategy is before the company gets into financial difficulties or even faces bankruptcy. It is useful when market or company changes are slowly gaining ground or are foreseeable in the long term and can therefore be planned.

Use the know-how of your workforce and draw on suggestions for improvement that come directly from the relevant experts. Your employees often have specific suggestions for optimizing their products or work areas and approaches for developing new products, processes or corporate strategies. In our article on improvement measures you can read how you can design this process with bottom-up planning.

Your company may spend a lot of money on employee benefits such as company cars, Christmas parties, daily meals, travel or employee gifts. The simplest method is to simply delete them. But what are the alternatives to reducing expenses without upsetting employees?
• Instead of bonus payments, offer, for example, longer unpaid leave for sabbaticals or further training.
• Link Christmas bonuses or similar special payments to the achievement of sales targets.

Employee programs, where your employees receive discounts on products and services from other providers, are also a valuable alternative that don't cost you any money as an employer.
• Do you have a product or service that employees can use for free without incurring any additional expense on your part?
• If you already provide your employees with company mobile phones with flat rate contracts, you can also allow private use here as a benefit.
• If company cars are only used sporadically because your employees are not regularly out on the road, for example, then it may be worth switching to a car-sharing service where you only have to pay for trips that have actually been made.

At this point, too, it can be worth thinking about non-cash benefits that are exempt from tax and social security contributions.
There are no limits to your creativity here. Maybe you will even develop a few unique ideas that will strengthen the cohesion of your company during the difficult time and have a positive influence on the working atmosphere.

If you have the benefit of flexible leases for your office properties, you can reduce expenses by outsourcing employees to the home office and reducing your locations. If you own your office property instead of renting it, you can lease the freed-up work space to other companies, creating an additional source of income.

Working from home has the advantage for employees that they have less travel time and costs, which makes childcare and leisure activities easier and relieves everyday stress. Oftentimes, the absence of distractions allows workers to work from home to be more focused, thereby increasing their productivity as well. Important: This is not the right form of work for every employee, many people then lack the social aspect. A mixed form can help, in which several employees share a workplace in the office and alternately spend one day in the office and one or more days in the home office.