Blog post

On the Verge of Hard Choices – Paycuts vs. Layoffs

It was bound to happen. After over a decade of growth, drastic market shifts have brought the tech industry to a slowdown. Time is yet to tell the severity of the situation, and in the meantime, companies are deploying a variety of preemptive risk management tactics to increase efficiency, limit spending, and prolong their runway.

In a survey conducted by Compete in July 2022, HR leaders were asked the following question: “Given the ability to make data-driven decisions, which course of action would you advise to take if reducing expenses is a must?”. Over 50% chose reducing employee welfare benefits. Layoffs came in second, amounting 22.2% of responses, then mandatory furloughs at 19.4%, and finally pay cuts was chosen by just 8%.

The tech industry contains a wide diversity of companies in various categories, maturity stages, and levels of resilience. It is clear that there are many additional parameters and options to consider and that the relevancy of the options provided in the survey may vary between organizations and not necessarily apply to some.

Let’s briefly examine the two more extreme measures of the options given.

Layoffs

The US, which normally serves as an economic precursor, experienced over 8,600 layoffs in the tech industry this July, according to https://layoffs.fyi/.

Reducing headcount and reorganizing departments may immediately impact productivity and the bottom line, yet choosing this path can impose severe costs down the road. Letting employees go can create a stressful atmosphere, which may lead to unhealthy competition, conflict, and burnt out employees. Factoring in the cost of severance pay, a negative public image, and eventually recruiting and onboarding new employees, draws a clear picture that this unpleasant choice should remain a last resort.

Pay Cuts

Scaling down salaries for a limited period until the threat recedes may seem a safer approach. It distributes the cutback across the company without the risk of being understaffed, while also lowering the cost on the organization’s most valuable resource, people.

From a legal standpoint, reducing salary, work hours, and benefits is fair play, so long as employees are given advanced notice. Furthermore, the reduction should be made equitably across the company, meaning that employees with higher salaries must sacrifice a larger sum.

Perhaps the more noble choice, yet this collective decision can severely demoralize employees. Compensation may entail a worker’s sense of value and self-worth, and a salary reduction will most likely affect motivation.

Looking Back

It is yet to be determined whether we are looking at a full-blown recession or not. Nevertheless market reactions in the past few months have been intense and we have already seen many measures being taken. Since this isn’t the first economic downturn in history, what can we learn from previous events?

According to the National Bureau of Economic Research (NBER), in the past half century there have been 7 recessions with an average duration of 10 months. The longest one was in 2007 (18 months) followed by the shortest one in 2020 (2 months).

In tumultuous times, measuring cash burn rate, the rate at which a company uses up its cash reserves, can help determine a company’s lifespan, according to Gartner. It is recommended for companies to take action and ensure this extends out to at least 18 months in order to secure long-term survival as well as opportunities to further fund the company.

Strategy refinement, when coupled with organizational agility, are fundamental to rapid recovery in times of crisis, as stated by BDO. Data is the key enabler for agility, increasing visibility to allow smarter decision making in real-time, such as reallocating resources to mitigate risks and capitalize on emerging opportunities.

Looking Forward

Generally speaking, in the tech sector it is customary to spend an average of 70% of the budget on compensation and benefits, the largest company expense by far. This places HR at a highly strategic position in helping to plan and promote the proper path for cost reduction.

Want to gain better visibility for reducing compensation expenses without increasing regretted attrition? Access the most accurate real-time data that will allow you to make difficult decisions with a sound mind.

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