Many organizations are facing challenges in maintaining financial prosperity with the current economic times. And one of the most common ways to reduce costs during said challenging times is for your organization to cut payroll expenses.
In this blog, you will learn about how to decide if a salary reduction initiative is the best solution for your organization, how to conduct a salary reduction, as well as how to announce the initiative with our salary reduction letter.
Now, let’s get started!
Salary Reduction Letter: How do you decide?
Before you create your own salary reduction letter for your employees, you’ll need to decide if this is the best option for your organization.
When organizations face hard financial times, there are several options for reducing costs:
- Voluntary Layoffs
- Reductions in Force
- Hiring Freezes
- Travel Freezes
- Expense Freezes
- Pay Freezes
- Reducing Work Hours
- Not Allowing Overtime
- Eliminating Bonuses
- Offering unpaid sabbaticals
And finally, there is doing a salary reduction. A salary reduction is when you reduce the salary of all - or a group - of your employees to reduce the overall payroll costs of your organization.
When your organization is choosing which method of reducing costs is the best fit, you need to analyze the business' current environment, and find the method that most closely aligns with their overall needs.
For example, if your organization needs to permanently shift business strategy, causing several employees’ skills to become redundant, you probably don’t need to reduce salary to more effectively manage your costs. In this situation, it would make sense to move forward with a layoff or RIF due to the huge impact it is having on your organization.
The best time to implement a salary reduction is several months out from a potential reduction in force.
For example, the perfect time to implement this would be if your organization has been seeing financial downturn for a few months, and you know that if things don’t change, a layoff could happen in six months to a year.
Several of the cost reduction strategies listed above also align with this mindset, such as the hiring freeze, travel freeze, expense freeze, pay freeze, reducing work hours, not allowing overtime, eliminating bonuses, and offering unpaid sabbaticals.
So, if you are in alignment with the time frame, how do you decide between all of the options above? Should you implement all of them? Or just a few? And for how long?
All good questions!
For each of the above cost reductions options, you will need to analyze the pros and cons of each, as well as the financial impact it can have on your organization. Then, compare this to your overall goals for moving the organization forward.
For example, if your organization needs to reduce monthly overhead permanently by $100k per month, a salary reduction would be a good fit. Reduced work hours and limiting overtime are only temporary solutions, but cutting pay is a more finite solution.
Here are some advantages of conducting a salary reduction:
- As said above, it is a more finite solution
- It is very easy to calculate the financial impact of the initiative
- It is easier to implement than a bigger reduction, such as a layoff
- If you eventually need to reduce your headcount, this will help start the process as many employees will probably look to leave after getting their pay reduced
While there are pretty great advantages, there are also several disadvantages that your organization should be aware of as well:
- Morale can take a huge hit from decreasing the salaries of employees
- Lower morale could decrease productivity, which will ultimately result in less revenue.
- It is difficult to answer questions about the timeframe for the reduction
- It increases the difficulty of hiring effective talent to perform at your organization
Once you have analyzed all of the cost reduction methods in the same way as above, analyze the financial impact they will have. From here, you will need to choose as many of the methods needed at one time to hit your financial goal.
Side note: for efficiency's sake, it is important to analyze the number of initiatives you have to implement. If it will take implementing all of the following cost reduction methods to meet your goals, it might just be easier to have a layoff event.
Finally, before you implement said methods you will need to understand the time frame for which they will occur. For example, if you implement a salary reduction, you will need to understand approximately how long this reduction will have to take place.
Your employees will ask you when they will get raises again after the reduction, and you will need to be able to answer that honestly. And if you think your organization will have to keep reduced salaries for longer than your annual review cycle, it might make sense to implement a corresponding pay freeze.
Finally, you’ll need to understand what it means for the organization when the salary reduction policy is completed. Will you reinstate original salaries? Or will you give raises to match their pay presently if there hadn’t been a salary reduction?
Salary Reduction Letter: How do you implement the initiative?
One of the advantages of this initiative is that it is fairly easy to implement.
The first thing that you will want to do when feeling out this option is to consult with your corporate counsel or an attorney. There is great advice online about how to implement a salary reduction, but that advice doesn’t take into account regulations and laws in your own state or locality.
Next, you will want to decide on a percentage salary reduction. Will you have the same percentage across the organization? Or will certain departments or levels of tenure have varying levels of reduction? This will be decided mostly by your overall goal for cutting costs.
Once you have these items done, you will need to notify your payroll team and prepare your human resource reps for any questions that employees might have about the new salary reduction policy.
Also, if you have resources available to help with retention during this time, your team should focus on implementing these as well. While you might want some turnover to occur because of the salary reduction, you won’t want to lose all of your staff.
And finally: you must notify your affected workforce of the upcoming reduction to their salary. Most organizations do this with a company wide letter, that can be delivered via email or in person.
Salary Reduction Letter: What should it include?
One of the most important aspects of implementing a salary reduction is the communication you will use to alert your employees of this change.
Without the proper communication, your staff will feel even more negatively about the change. This can result in extreme turnover, poor morale, and very low productivity.
So, it is important that you get it right!
Here are the different items you should include in your salary reduction letter:
- Boilerplate letter formatting: date, subject, greetings, and a signature from your CEO.
- An explanation of why your organization is facing financial hardships, such as the economy, or an industry disruption.
- An explanation of all of the cost reduction methods you have reviewed before deciding on this one.
- Notification of the salary reduction, instructions on what percentage your employees’ salaries will be reduced, and when the change will occur. (Include this for both hourly and salaried employees.)
- A timeline of when this policy will be reviewed and what the expectations are for the reduction.
- Show appreciation for your employees hard work, dedication, and continued loyalty to your organization.
- Offer a resource for the employees to use if they have further questions, such as your Human Resources department.
Throughout the letter it is important to have a friendly tone, but to also be honest about the situation. This is the most respectful way to treat your employees.
And as always, before you send the letter make sure to have your legal team look over it to ensure compliance with any laws that pertain to your location and industry.
You can download our sample salary reduction letter here: