Layoff or Wage Cut
Liberty University
BUSI620: Global Economic Environment
Dr. James Ibe
July 20, 2024
Layoff or Wage Cut
Pay reductions offered to staff members in lieu of layoffs appear to benefit both employers and
employees. Or, at the very least, it appears appealing. It might be difficult to offer pay reductions to
avoid layoffs since employers have to determine how much is necessary and take other labor expenses
like benefits and payroll taxes into account. But if a company does try to reduce compensation.
Confino (2023) reports that while many employees would take a 25% wage cut to avoid being
laid off, 97% of employers do not even inquire. An agreement to lower an employee's pay, either
permanently or temporarily, is known as a wage reduction. It might also entail a decrease in
employment duties. Reductions in pay may occasionally be unavoidable that employees accept, despite
possible concerns about team members leaving.
Employers are permitted to reduce employee compensation if they follow certain guidelines. For
example, they cannot reduce salaries retrospectively; instead, they must pay present employees the
wages that were previously agreed upon. Salary reductions may not be your first option, but in many
cases, they may be the only one worth considering. These are some typical explanations for why you
might decide to lower employee pay.
Businesses may need to lower operating expenses during tough economic times to safeguard
their cash flow. Payroll reduction can contribute to a reduction in overall expenses as labor costs can
make up as much as 70% of an organization's total business costs. Reducing compensation rather than
furloughing or terminating employees might be a better course of action to protect staff members. An
employee might be open to accepting a pay decrease as part of a transition if they are changing
positions, like accepting a demotion. Payroll reductions can contribute to the preservation of workers'
jobs and general financial security. In the end, cutting wages is an essential step in guaranteeing a
business's financial security in trying circumstances.
References
Confino, P. (2023, August 10). Many workers facing a layoff would accept a 25% pay cut to keep their
jobs—but 97% of bosses do not even ask. Even the researchers are stumped why. Fortune.
https://fortune.com/2023/08/10/employee-pay-cut-layoffs-study/
Kelly, J. (2024, March 20). Layoffs and pay cuts hit CEOs and managers. Forbes.
https://www.forbes.com/sites/jackkelly/2024/03/18/layoffs-and-pay-cuts-hit-ceos-and-
managers/
McGlauflin, J. a. a. P. (2023, December 20). Offering Pay Cuts to Stave Off Layoffs is Easier Said Than
Done for Employers. SHRM. https://www.shrm.org/executive-network/insights/offering-pay-
cuts-to-stave-layoffs-easier-said-done-employers
Schooley, S. (2024, July 10). Do not want to cut employees? Try cutting salaries. business.com.
https://www.business.com/articles/cut-salaries-not-employees/
