And Other Ways to Save Money

Most businesses would rather fire employees than cut their pay, though cutting pay could mean that more people keep their jobs.  It doesn’t make sense, but it does seem to be how management thinks.

Ray Fisman recently reviewed the pros and cons in Slate and concluded:  “this aversion to pay cuts isn’t good for workers or the American economy more broadly. More people end up losing their jobs than if wages were more flexible, and there are serious long-term consequences for the workers who lose their monthly paychecks.”

The problem for management is that they believe pay cuts arouse resentment, and there is evidence to back them up. “In experiments where workers were randomly assigned to receive wage cuts, they retaliated by slacking off.”

If we look closer at the experiments, though, it’s not hard to understand why.  What to a researcher is “random,” to a subject of an experiment is “arbitrary.”  It will seem patently unfair for one group of workers to have their salaries cut when others, for no apparent reason, are spared.  And, then, employees who feel powerless in the face of the arbitrary acts of management will surely assert power in the only way left to them.  They will resist passively and work less.  (See, “Raises Don’t Make Employees Work Harder, But Pay Cuts Make Them Slack Off.”)

Similarly, if management doesn’t share in the pain, workers will feel exploited and abused.  A story in The New York Times brings that home.  Gannett, the American newspaper chain, announced a week-long furlough for employees, the third year in a row.  At the same time, the president announced that he and top management “each will be taking a reduction of salary that is equivalent to a week’s furlough.”

Sounds fair, but The Times went on to point out:  “last month [the chief executive] received a cash bonus of $1.75 million for 2010 and [the president and chief operating officer] received $1.25 million. For 2010, they were also awarded stock, options and deferred compensation that would bring their combined packages to $17.6 million if the company and its stock hits certain targets.”  (See. “At Gannett, Furloughs but Nice Paydays for Brass.”)

The employees, understandably, were incensed, especially when the bonuses were justified on the grounds of the executives’ alleged success in cutting costs.

Fisman in Slate spoke of the need for “creative solutions.”  But workers are not dumb, and they know the difference between “creative solutions” and ingenious deceptions.  Sharing the pain might work to reduce resentment if the pain were really shared.

Could it be that management’s aversion to pay cuts, then, stems from their fear that gestures designed to make it seem as if they were actually cutting their own incomes would only backfire, and then workers would really have reasons for resentment.  Maybe it is safer just to fire them.