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Have you had success at reducing salaries?

How to cut employee salary expenseSimply stated, there are three types of employees - "over achiever," "under achiever," and the dreaded "happy in the middle" - -"Over-Achiever" - This individual should be recognized as potential future management. This person can be kept engaged through bonuses. -"Under-Achiever" - Your approach will be counsel to correct; warn to correct; warn to correct. If no correction - terminate. This process can take nine to twelve months to complete. -"Happy in the Middle" - This employee cannot be motivated, to aspire for something more. Does work assigned, but nothing more. This person strives to "stay under the radar." In at 9am, out by 5pm. It is this group, for which my question is based. The "Happy in the Middle" person will start a job with the appropriate compensation. Five years of 5% increases and quickly that person has become too expensive for the position. The options to address this person - -Lay-off - Not practical. I cannot re-fill the position for a few months. Ethically wrong and maybe illegal. -Freeze Salary - This solution is not practical. The overpayments will continue until the market rate equals or exceeds the current rate of pay. -Reduce pay to the market rate - Question above. If you have not had experience in this situation, I still would very much like to read your opinion. Thanks

Answers

Topic Expert
Mike Caruana
Title: Director of Financial Services
Company: Diamond Resorts International
(Director of Financial Services, Diamond Resorts International) |

I've only had limited success with salary reductions. Most of the time the team members said they understood, were perfectly fine with it, etc. - but then bemoaned the change privately, were demotivated, and some eventually left. Not ideal. I prefer assigning tasks/projects that push the 'Happy in the Middle' person out of their comfort zone. This is risky, too. Many people do not like being pushed out of their comfort zones.

Regarding the merit increases taking them out of the price range for their position, 5% is a generous merit increase - which I don't see many 'Happy in the Middle' people attaining. They're usually the 1.5-3% group...if that. The performance management and review processes might be more in need of an overhaul than the 'Happy in the Middle' team member(s).

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

I have heard (never researched it) that in some states it is illegal to demote pay for the same position. However, if the person’s position was eliminated, but you were to move them to a lower-level position, then the pay could be adjusted downward.

Regarding merit increases, if a bonus structure is not in place, then I do not feel 5% to be generous. With the rate of inflation hovering around 2% and consumer goods increasing in cost, 5% doesn't cut it as generous in my opinion without a bonus structure, there again, that is my opinion. It is nice to receive a raise of any sorts.

The people that are happy in middle, maybe a 1.5%-3% raise is a good common place. There again, some employees may become cynical and work less for a small raise. Maybe it is better to give no raise at all to the happy in the middle people. Explaining to them why nothing was paid to them.

Raises where I work now are essentially non-existent. It is something I have come to grips with. However, bonuses are generous, as well as the environment I work in.

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Many years ago when I worked for Kmart HQ (back in the good days of Floyd Hall), they had a level structure. A staff accountant was aware that their pay range was between level A and level B. When someone hit the high end of their level, they were encouraged to look at new positions, upgrades of level and responsibility. The salary cap was reviewed every six or so years and adjusted for inflation and changes in the market.

There were bonuses available as well. They were based partially on how the person performed, and partially on how the company performed. This knowledge limited salary "stray's" from holding a department hostage to underwhelming performance at an overachieving salary.

People who ended up outside the salary range (someone always sneaks through) were told about the limit and how they exceeded it. They knew there would be no more raises until the next corporate salary adjustment, and that their annual bonus would depend on how they performed as well as how the company performed.

The world is not fair, but when faced with seeing how they were being paid significantly more than a peer in the industry, they are limited with who they can vent to. Should they complain to their peers who make less than themselves...

Cindy Freeman
Title: Office Manager / Adjusting Assistant
Company: Freeman Adjusting
(Office Manager / Adjusting Assistant, Freeman Adjusting) |

I think we should take care in how we define a "Happy in the Middle" employee. I don't believe you can group them all together into one problematic category. While some employees can stagnate in a position and become a liability, many individuals who fit into this category are assets...having become very good at what they do and being happy doing it. Every business needs reliable employees in the middle, and not everyone has to aspire to greatness to be successful. There are so many reasons for an individual to not seek promotions and/or greater responsiblity...contentment with their current job, caring for children or aging parents, work-life balance, managing chronic medical conditions, etc. There is so much pressure to be driven in today's corporate culture, that being successful at your job has become a negative. I think this is a mistake. These people are the dependable backbone of any business and should be appreciated. Pressuring these employees to "Over-Acheive or Else" can drive them right out the door. When determining whether these individuals should receive merit/cost of living raises, management should also consider the cost of replacing that employee and losing the value that they bring to your business on a daily basis.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

Cindy – I am sorry but I disagree. Every position has a value. Note – I am separating the person, from the position. I would pay a doorman $30,000, but not $60,000. Likewise, I would pay an attorney $200 an hour to open a company for me; but not $400 an hour. The idea is based on the fact that if a company pays an employee more than the market determines is the proper wage, they are paying too much.

Now let’s speak about the person. If you are happy earning $X and you are at the top of the salary range, can I cap your salary? You have chosen to stay where you are for whatever reason, and I respect that decision. But as the owner/shareholder, am I required to continually give you a salary increase? The truth is that employees expect salary increases annually.

All agree that compensation should be linked to your performance and the value you provide to the company. If the value increases, all would gladly pay more. But if the value stays constant, shouldn’t the pay stay constant?

Anonymous
(CFO/Board Advisor) |

I completely disagree with your position on this. A couple of examples:

Using your first note above, do you reciprocate when the opposite happens? That is, when the market value of the position has risen, do you give the employee a "market adjustment" raise automatically? His performance hasn't changed one bit. Only the market has changed. There isn't an engineering team executive in the Silicon Valley that hasn't had an engineer tell him the market has risen, and either he gets market value or he leaves. Multiply this by everyone on the engineering team. Also, how often have you been confronted with an employee saying: "I could get a 20% increase if I were to leave. Are you telling me the only way for me to get a market rate of pay is to leave? And, if I do, you will have to pay my replacement market rate, plus incur the cost of recruiting and training that individual. And oh, by the way, there is no guarantee that the person you replace me with will be as good as me, or worse won't be any good at all, and you will have to replace that person as well. Why not save everyone the hassle, and save the recruitment and training costs, and just pay me market rate?"

Your second example also concerns me. Lets use a real life example I have had. I once had an A/P Manager with 30 years experience. She was very good at her job. She accomplished every task given her. Her skill set and education was such that she had progressed to the top of her skill and salary level. There was nothing she could do which would provide her a promotion or advancement. And other than a made up title change, there was no upward position for her. She could do her job successfully in an eight hour day, and not have to work weekends. She had been a long-term, loyal employee, and was well liked and respected by all. Her value to the company was constant. Now, are you saying that because she was making more than market we should stop rewarding her annually? I don't agree that is the correct answer. Every company needs folks like her.

So, here's the deal, she was making $60,000 per year, which was $15,000 more than the market at the time, for the sake of the $1,250 per month it cost the company (which is next to nothing, at a $200 million revenue company) it sent a strong message to all of the troops. It said: "We will take care of you". You can't send that kind of positive message to your employees any cheaper. Providing her with continued 5% annual increases ($3,000/year or $250/month) was far better spent than having her salary capped or reduced. Also, replacing her and dealing with the fallout from the troops. would be far more costly.

Sometimes the right answer isn't the low cost answer. Sometimes the low cost answer isn't obvious at first glance.

Topic Expert
Karoline Mello
Title: Director, FP&A
Company: Apollo Group
(Director, FP&A, Apollo Group) |

Your HR department should be involved in a job leveling project that does market comparison on the position and sets a salary range. One example is to evaluate all job codes and then rank them 1 – 10 so each position as a job code and a level. The salary ranges can be determined for each level. Then yes, when a person hits the top of the range it can be a salary freeze or a 1% increase only.
I agree with the advice here, it sounds like your management team needs to really be evaluating their staff and not just handing out the annual 5% increases across the board. The managers seem like they are happy just being in the middle and not having those conversations.
This behavior as an organization does lead to over paid employees – and unfortunately they can’t move on because they can’t demand that salary starting out somewhere else. As my boss says, this is a recipe to keep your losers and lose your keepers.

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

Regis,

Interesting topic. It reminds me a bit of the Jack Welch approach to lop off the bottom 10% every year, a strategy that GE has discarded.

I differ with your original generalization that those in the middle "cannot be motivated to aspire for something more." I've rarely found that to be true. A manager's idea of "something more" may differ from the employee's. The effective manager works to understand these details about each employee and to take actions and communicate paths for growth that benefit both employee and company. There's also an unfortunate tendency to label those who don't want to manage as "lacking aspiration."

Concerning pay for an employee who delivers constant rather than increasing value, that is still added value. Unless the employee isn't meeting expectations, which by definition drops him/her below the middle group, a 1.5-3% raise is largely tracking inflation and does not leave the employee much better (or worse) off. You could argue that the company pays more for the same productivity. Companies that try to save their way to success often RIF people in this middle group. They make easy targets in the drive to increase efficiency and productivity. Frequently, the business suffers, at least for a while, when such cuts are found to have been "too deep."

A recent employer of mine publishes its job and pay grade information. A 5% increase would have been unusual for someone other than a top performer or for a promotion. There was a maximum and minimum for each salary grade. Levels were reviewed annually against market pay data and adjustments were made to maintain competitiveness. The employee's performance rating and position (relative to midpoint) in a particular salary range influenced both the amount and frequency of a pay increase. Everyone had at least an annual formal performance review and, for the majority, that was accompanied by some level of increase in base pay, irrespective of bonus-eligibility. Weaker performers (not necessarily the weakest, who might have been moving toward separation) that were high in a pay range might see a modest salary increase on an 18-24 month cycle.

I have rarely seen salary reduction unless accompanied by a clear reduction in responsibility or a change in pay formula (such as lower base but higher bonus/incentive potential).

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Let me add another associated topic - the idea that a raise should not be given at the same time as a review. I worked somewhere where the boss clearly stated that these two items were to remain separated. There were annual reviews but raises were handled at a completely different time. I am not sure why he was so adamant about these things, but it had a negative impact on everyone. Reviews no longer carried the same weight as when they also addressed merit increases, and the idea of a raise was some random figure you were given when the company determined it fit in their budget.

Your thoughts? Any suggestions for how to encourage a boss to change their way of thinking?

Anonymous
(CFO/Board Advisor) |

Back in the very early 1980s, Arthur Young & Co. in Los Angeles separated compensation increases from performance evaluations based upon the advice of some management consulting study that was commissioned. The concept was that if compensation and performance were discussed during the same meeting, there was the possibility that the entire review discussion would center around compensation and not performance. The concern was, that if the raise was discussed at the beginning of the meeting, and the raise didn't meet the employee's expectations, then the employee would basically checkout and not listen to the performance part. If the compensation part was left to the end of the meeting, the concern was, compensation was all the employee was thinking about and still missed the performance part. If the raise met or exceeded the employee's expectations (it happened sometimes) then the employee still missed the performance part because (s)he felt (s)he was meeting or exceeding expectations so how important could any areas of improvement really be.

Well, this was a disaster. Basically, the real problem was, the Reviewer had no authority or ability to change the raise during the meeting, even if the Reviewer agreed it should be changed (increased). In addition, the Reviewer needed additional approval do this and thus was left in the position of not being able to commit to a change. It usually took 5 -10 days to get an answer. By that time, the employee was fairly upset. Also, sometimes the Reviewer was delivering a message which they disagreed with, and didn't do a good job of covering up that disagreement. Of course this made things even worse. Lastly, the whole concept of pay-for-performance, which was repeatedly beaten into us, became a joke as there was no longer a direct connection between the two.

After one or two tries at separation (I forget exactly, it was along time ago), AY changed back to doing compensation changes and performance reviews at the same time.

Tell the Boss this concept has been around for more than 30 years. It was a disaster in the early '80s and is still a disaster in 2014.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

I am enjoying this discussion. I wanted to jump in and add something to what the Anonymous CFO is saying about giving people raises. I don't think everyone deserves a raise ever year, regardless of what inflation and the market says.

It all comes down to what a very intelligent person that writes on this website has said numerous times. To paraphrase her words, you are in control of your career and of your paycheck. If you don't like what you get paid, look elsewhere. Don’t expect others to manage your career and pay for you.

The money follows hard working employee in one way or another. Either ask for a raise, justifying why you deserve one, work with a recruiter, or sign into Indeed or LinkedIn and start looking. Just because Robert Half thinks you deserve $85k+, doesn't mean you actually do.

Anonymous
(CFO/Board Advisor) |

Chris,

Thanks for the add. I agree with you, everyone doesn't deserve a raise every year. However, to single someone out and give them no raise because their compensation is "above market", when everyone else who had a similar performance rating received a raise, is just flat wrong. My experience is that if you do this be prepared for some heavy fallout from a whole lot of people, some of whom you don't want to lose. In most situations, providing a raise to someone who is already above market, is nothing compared to the cost of not giving the raise and treating the employee differently than everyone else.

One last comment, and it is something I have used in the past in these situations, and that is to give no raise, but provide an annual lump sum payment. Not necessarily a "bonus", just a lump sum payment each year. This way the "salary" stays the same, but the employee perceives they are getting a raise, and it is just being paid all at once. The concept of the effect of an annual compounding of raises is usually not an issue.

Anonymous
(CFO) |

I have always been wary of paying people more than market since if anything should happen to their job they are left with a huge compensation gap if they have to start over at the market rate somewhere else.

V Miller
Title: Consultant
Company: MyCFO
(Consultant, MyCFO) |

In order to be profitable, we capped all salaries at $100,000, including executives & owners. In the eyes of hard-working staff & laborers, this was magical. They saw management was first to contribute. I initially did present to the entire company the financial picture and that steps needed. Next, I interviewed manager & director-level personnel about their commitment. The salaries of all management were reduced without loss. In practice, the Ben & Jerry theory worked wonderfully. The company, subsidiaries & sisters (except owner's racing company) reached lower overhead and initial profits. Our new & old bankers were pleased. Then we moved on to reduce our liabilities & expense in company-owned cars & cell phones, leased cars, un-capped T&E.

V Miller
Title: Consultant
Company: MyCFO
(Consultant, MyCFO) |

Lots of good thoughts above. Here is what we did to return company to profitability. We held a company meeting to share the market & financial conditions. First change was to reduce all executive & owners salaries to $100,000 cap. The reaction was well received, in fact magical with rank & file. The manager-level salaries got about a 10% cut. This was after extensive discussions regarding their committment to company. All managers stayed. The fact that the Ben & Jerry theory worked so well, added to the quick return to break-even.
Beyond that, we moved on to reducing company liabilities & risks of employee-controlled expenses; by elimination of company-owned cars, cellphones and company-leased cars. Instead we provided monthly capped-allowances for employee-leased vehicles, cellphones, mileage, meals and other T&E.

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