Why pay cuts are always better than layoffs
Like many small businesses, my company took a massive financial hit after the outbreak of Covid-19. Gravity Payments is a credit card processor that primarily serves small and mid-sized businesses. Our cashflow depends on how many credit card transactions our clients run each month. By mid-March, our revenue had fallen by 55 per cent and we calculated that, unless something major changed, we would be out of business within four to five months.
Most businesses in this position raise prices to customers or lay off a large percentage of their staff — or perhaps do both. Several of our competitors did just that. Toast, which makes software for restaurants and is valued at $5 billion, laid off 50 per cent of its staff in April. Many other companies followed suit. By the end of May, one quarter of the American workforce had filed for unemployment.
I could have laid off 20 per cent of our 200 employees and immediately made up our budget shortfall. But in the 16 years we have been in business, we had never laid anyone off.
In 2015, when I announced a $70,000 minimum wage for everyone at our company, I committed to taking care of the people who helped our company grow. Laying them off now would betray that.
But I still needed to figure out how to keep everyone on the payroll without bankrupting the company. We laid out the reality of our situation during an all-company meeting. By the end of the conversation, 98 per cent of our employees volunteered to temporarily cut their pay by anywhere from 5 per cent to 100 per cent.
We capped the amount people took based on their salary, with the highest cap being 40 per cent to 60 per cent for employees making $200,000 or more and the average pay cut being about 20 per cent. Our employees’ sacrifice allowed us to reduce our payroll expenses by 20 per cent. Our chief operating officer and I cut our pay to $0 in solidarity.
This decision bought us some time. But more important, letting our team decide how to save the company made it clear that we were all in this together. It empowered them to focus on their work of helping struggling businesses without worrying if they could feed their families or make rent. Instead of looking at our employees as expenses that could be cut, we acknowledged their humanity and the vital role they play in our business.
The result? Our team have been more productive than ever before. In March and April, our sales were down, but every month since then, we have outperformed ourselves from last year. In July, sales were up 31 per cent from 2019 — despite no increase in headcount.
Avoiding layoffs helped our company weather this crisis. Knowing that a recession was possible even before we had heard of Covid-19, we had saved up enough cash reserves to get us through a 20 per cent dip in sales. We were also fortunate enough to secure a paycheque protection programme loan, which helped us cover payroll. We’ve also restored everyone to their full salaries and paid them back the money they lent us last month.
Our company is only one example, but research shows that we are not an exception. Companies that resort to layoffs perform worse over time than those that do not.
One study from Harvard Business School found that after one Fortune 500 company laid off 15 per cent of its staff, the number of new inventions it produced fell by 24 per cent the next year. Another study found that a 1 per cent reduction in staff correlated with a 31 per cent drop in voluntary turnover in the next year. Yet another study revealed that those who continue to work at a company after a layoff experience a 41 per cent decline in job satisfaction and a 20 per cent decline in job performance.
Many businesses, especially smaller ones, had no choice but to let employees go or furlough them. But many larger companies had a choice and they chose poorly.
JC Penney furloughed 92 per cent of its workers at the start of the pandemic and laid off 1,000 employees last month. And yet, shortly before it filed for bankruptcy in May, the company approved a $10 million payout to executives.
Neiman Marcus furloughed more than 11,000 employees in April but paid its chief executive $4 million in bonuses in February. Within days of filing for bankruptcy, Hertz laid off 10,000 workers but then offered $16.2 million in retention bonuses to senior employees, including $1.5 million to its top three executives.
We still have a long way to go before Covid-19 and the economic damage it has caused are behind us. But crises are not a time to abandon the people who have worked so hard on our behalf. They are a time to come together and use one another’s knowledge, expertise and creativity to solve the problem together.
• Dan Price is founder and chief executive of Gravity Payments and author of Worth It: How a Million-Dollar Pay Cut and a $70,000 Minimum Wage Revealed a Better Way of Doing Business
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