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Gints Salaks – Reflection

by on October 31, 2007

Layoffs and Salary cuts

Today when America and some other places of the world experience economical slowdown, many companies are stuck in crossroads on deciding how to make their organizations leaner. Whether it means laying off employees or suggesting pay cuts, either way, it is an unpopular decision among executive teams. In recent in-class video “Lay Offs and Salary Cuts”, the CEO’s suggestion on 10% salary decrease in his company was a disastrous idea because it resulted in a decrease in worker productivity and morale from the employees’ anger over pay cuts. I would like to talk in this paper not only about pay cuts and how demoralizing they are for the organizations, but I would also like to turn your attention to what’s going on in economy and how that influences employees and employers. Many employees are worried more about keeping their jobs rather than loosing some share in their salary.

Many of us today have noticed that employers give fewer bonuses, health benefits are getting thinner and lunch rooms are filled with less free food. According to Penelope Patsuris, most firms have already cut the fat out of their corporate structure, so further dismissals will only hinder a company’s performance during already difficult times. Executives at companies everywhere have been seeing their salaries and bonuses slashed, but no one is about to feel sorry for the fat cats, much less protest such hardship. But cuts for the rank and file are a much more delicate issue.

Despite the fact that lay offs leave companies better financially in the short run, upon an economic recovery, an understaffed company will have a harder time gaining market share and will also have to incur the extra expense of hiring a new staff. Many organizations understand this dilemma and offer their employees the option to accept pay cuts. This situation can only happen in economical hardship and no employee will accept this offer during good times. As Greg Levine tells in his article, “We’re all unhappy about the pay cuts, but there was no choice. It was either we agreed to this or we shut down, because we can’t afford to operate.”

As we can see in example above, employees are willing to accept salary cuts because they see that it will help them to save their jobs. That example has nothing to do with organization’s culture. As we mentioned this in-class, the organizational culture is left in second place when decision of saving your workplace edicts. For example, when Northwest Airlines was on the edge of bankruptcy, the pilot union and the company’s executives stroke a deal – “none of us are under the illusion that this agreement will permanently solve all of NWA’s financial problems; it will not…However, it can help reduce the immediate and significant threats to NWA pilots’ jobs and retirements.” In this case, it was also in the deal that Northwest executives will accept the same 15% salary cuts. This example shows that people are scared about their future and that’s why they choose to accept the deal rather than quit.

When the headquarters manage to deliver a clear and meaningful message to their employees, many will listen and try to negotiate the deal if the company has fallen in hardship, but the employees have to be prepared for that kind of message. It can’t just happen and be like “oh by the way, we will also cut your salary”. In this case, employees will be mistreated and abused. This situation happed in the video we saw in the class when the CEO announced laying off the engineering team, reducing overall company wide expenses, which included salary pay cuts. This message was unexpected and shocking. As we will see in the next example, the Republic of Latvia currently has the highest inflation in the whole European Union. To deal with this situation, the government suddenly decided to freeze all state salaries which led to statewide protests.

Today Latvia fights an inflation rate of 10% and all previous attempts to stop it has failed. A week ago or so, the prime minister of Latvia announced to the press that he proposes to “freeze” all state employee salaries. Suddenly, so many professionals like teachers, medical workers and culture employees decided to go on strike. Today when private sector has higher salary than state employees, many see this as an opportunity to leave their state jobs and work for a private sector. In my previous reflection, I mentioned that this is also a catalyst which channels bribery in the government. Now the government is in crossroads to figure out the next year’s budget so that state employees get their promised salary increase. The parliament will need to find other places where to save money and control the spiral of inflation. The government has argued that many state institutions have already ridiculous 10% or more salary increases per year. Some experts believe that it is a Catch 22 – people get more money, and they buy more. The seller increases prices, so the employee demands for more money, so the inflation goes up. As we see today there has to be a point where one agrees on stopping this spiral.

From this example, we can see that the people of Latvia are not ready to accept a salary decrease or “freeze” because this message was delivered so suddenly and unexpectedly that people started protests. If the government had come and presented more information, explained step by step next plans, the situation might have been different. Now, we have this situation like in the video, the people of Latvia are demoralized and trust the government has been lost. Only time will show if the government will be able to make a right choice regarding the salaries.

Greg Levine. Steenland: Northwest CEO Joins Pilots in 15% Salary Sacrifice. Forbes Magazine, 11-05-2004.
Penelope Patsuris. Pay Cuts Hit Rank And File. Forbes Magazine, 10-26-01
Latvian News Portal.

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