A pay freeze is a great tactic for organizations looking to improve their bottom line. It is a policy that your human resources team will create that states no employees will receive a salary increase during the freeze.
This means that during performance reviews, your organization will not give out any raises. Whether that raise be for performance or a cost of living increase.
Your freeze may have exceptions for different situations. For example, your policy could institute an executive approval process to increase the salary of a top performer that would otherwise leave the organization.
Organizations typically institute a pay freeze when they are having financial difficulties. It is a less drastic measure than having a layoff event, so many companies implement this before any other type of cost saving measure.
Before we dig into the logistics of a pay freeze, make sure to download our “No Salary Increase Letter” to send to your employees with the button below:
Now, let’s get started…
What should you include in your no salary increase letter to employees?
Well, you will want to write this letter with the most clear and precise language possible. Be direct, but also be empathetic.
To start your no salary increase letter, explain the current financial climate and the steps that your team has taken to analyze options for improving your financial situation. This will help give your employees context as to why no merit raises will be given.
Next, announce that you will not being giving out salary increases this year. Explain that you know how this will impact everyone and their families to show empathy. This empathy will make your organization appear less cold and help your employees understand the weight of this action. Finally, in your no salary increase letter explain that your team has reviewed several other options and this was the best one, with the least amount of impact overall on employees.
You should then let your employees know what the steps will be after this pay freeze, too. For example, you should say how company financials will be reviewed (it could be a good idea to give a cadence here), and if salary increases will be given out if the financial situation improves at any of these checkpoints.
This is one of the most important points in your no salary increase letter, as it will give direction to your employees that will motivate them to continue working hard.
Finally, make sure that you thank your employees for their hard work in your no salary increase letter, and let them know that if they have questions that they can speak with a human resources representative. Letting your employees know that you appreciate them will go a long way during a stressful financial time. It will help them stay engaged at work, which could eliminate any employees from jumping ship from your organization. Also, offering the ability to speak with a human resources representative shows that your organization cares about its employee’s thoughts and wants to acknowledge any issues that they have.
The Pros and Cons of Pay Freezes
One of the biggest pros of instituting a pay freeze is the low impact that it has on your employees. As I said earlier, it is less drastic than a layoff, so the impact to your employer brand and employee morale will be minimized. While you will still have some disgruntled employees, it will be less so than instituting a large reduction event.
While instituting a pay freeze does make less waves than other events, it is not without its own issues. If your company is struggling to financially succeed, your organization will need its top performers to put in extra work to ensure future success. The problem with a pay freeze is that it discourages your top performers from staying at the company long term to ensure this success.
Your top performers need incentive to stay because they are definitely getting interest from other organizations for open positions. Now, many of your top performers probably have intrinsic motivation to stay based on their investment in the company’s culture and values. But, if they are rattled about the stability of the organization over the long run because of these pay freezes, they might be willing to pursue these opportunities.
And here is the bad news: your top performers carry the organization. If they leave, it isn’t like losing 1 employee, it will be liking losing multiple, or even a whole team! To lose multiple top performers during a pay freeze for these issues could be catastrophic to the organization’s goal to turn around a bad financial situation.
A downfall of pay freezes is that they can become a long term occurrence. Many of your employees, and also your top performers, will understand a why short term pay freeze is necessary. But if your pay freeze lasts for several months, or even several years (yes this really happens!), your employees will become disgruntled and want to leave because they feel under appreciated.
Pay freeze exceptions can also be a huge issue. While a hiring freeze exception might annoy your employees, pay is a much more personal issue. If one of your employees get an exception during the pay freeze, and others find out about it, they will become severely disgruntled. That is why you should have an absolute policy where no one gets a salary increase, or require a clause in an exception’s increase offer that requires complete silence about their raise.
Pay freezes are usually not done in a silo. They can be instituted along with a hiring freeze, corporate travel ban, or expenses freeze to improve your organization’s bottom line.
When reviewing all of these tactics, you will need to estimate how much improvement is required to turn your organization’s financial situation around, and how much cost savings each of these tactics will provide.
You will also need to estimate the impact that each of these tactics will have on your revenue generation abilities. If a pay freeze will minimize costs, but also minimize revenue generation because of lost talent, then you might want to look into using another tactic.
If a pay freeze, or any combination of these freezes above does not have the impact that your executive team desired on your bottom line, your HR team should assess other reduction measures. Payroll is one of the most expensive line items for an organization, so you might want to look into an event that reduces your workforce. Such as a furlough, reducing work hours, offering unpaid sabbaticals, voluntary retirements, voluntary layoffs, or a reduction in force.
Before you implement any of the above reduction events, your executive team needs to assess why your pay freeze (and any other freezes) weren’t effective. They also need to come up with a goal for improving the bottom line that is quantifiable. This will help your human resources team pick which type of event they should execute on.
For example, if your executives only need reduce payroll costs by 3%, it might make more sense to offer a voluntary layoff. You probably have members of your workforce that are interested in leaving, or have become disgruntled during your freeze period.
For many organizations, it makes sense to continue any pay freeze, hiring freeze, travel freeze, or expense freeze while carrying out a reduction event. Since they are not directly related, they can all be done at the same time to help improve the bottom line of your organization. Just make sure that you analyze the negatives associated with having a freeze in place over the long run if you choose to have it remain in place during a reduction event.