‘We're Cutting Your Salaries Because We Care’: One Firm’s Story
In March, as the market plummeted, Origin Investments co-founder and principal Michael Episcope and his partner David Scherer were scrutinizing the private equity investor’s revenue, cash on hand and other factors, trying to assess what they needed in order to extend the company's runway some unknown amount of time. Would it be three months? Six months? Two years? While the future was unknown, the present called for drastic action.
According to an early pandemic Korn Ferry survey, one in four firms in China said it would make salary adjustments in response to the coronavirus. It wasn't long before this cost-cutting approach arrived stateside: Many companies, including Redfin, Knight Frank and Compass, have reduced salaries to stay afloat. Largely, these cuts have impacted C-suite and upper-level management, while many workers further down the ladder were laid off or furloughed.
But for some companies, salary cuts are not just about cutting costs, but about retaining staff. Episcope and Scherer found a way to reduce pay and bring Origin to a break-even point without sending any workers into the fray of unemployment claims.
"Everybody has to make different decisions based on where their company stands, but as leaders, we have to make sure that the company is viable at all times and to make sure everybody has a job in five years,” Episcope said. "You might be making decisions that don’t make profits in the short run. You have to look at the horizon.
“We decided to kill every deal in the pipeline,” Episcope said. "We went from the best two months in our company, celebrating and about to go to Las Vegas, to canceling that trip and cutting everyone’s salaries.”
As part of the company's continuity plan, the leaders opted to reduce salaries across the board. They called everyone on a late March Sunday — including four new hires — and exercised what Episcope called "radical transparency" about the company's next steps.
“You always want to be wrong in these decisions, but I think we were only wrong in the sense that it got much worse than we ever thought it could," Episcope said. "We sat everybody down and said, 'We’re going to practice something called shared sacrifice: David and I are not going to take any salary and we’re going to cut everyone’s salary 20% to 30%.'"
“We’re not cutting your salaries because we think you're worth less," he told the team. "We're cutting your salaries because we care about each and every one of you, and we don’t want to send you to an unemployment line that has just grown by 10 million people."
In other words, rather than lay off some team members completely and continue to pay others 100%, Episcope said Origin evened out the loss. Constant, open communication with the team about the company’s decision-making processes — and the underlying financials — fostered acceptance and confidence, he said.
Pay cuts may not be as widespread as eliminating workforce or sending them home, at least temporarily, but they are a good alternative to gutting the talent companies work for years to build.
A recent op-ed in Harvard Business Review, co-authored by former CEO of Beth Israel Deaconess Medical Center Paul Levy, who helped the hospital avoid layoffs during the Great Recession, encouraged leadership to consider cutbacks as a layoff alternative after Beth Israel’s 2008 success.
"A four-day work week for roles where you have excess capacity will reduce staff cost by nearly 20%,” the authors wrote. "Some employees might agree to working half-time if they know that doing so will save jobs."
Indeed, Episcope predicts that shared sacrifice will foster goodwill and hopefully lead to payoff later.
"Case studies show that companies can do much better retaining their team once things start recovering," he said. "If you can avoid layoffs and keep people on, when you get to the other side you will be stronger and grow faster than your competition, and employees will be much more loyal."
Not every company can make this approach work, and for those who are considering it, there are caveats. According to a recent Lexis Practice Advisor white paper on managing workforce decisions during the pandemic, reducing hours, wages or salary can pose risk. It could mean triggering the Worker Adjustment and Retraining Notification Act requirements or Fair Labor Standards Act minimum wage and overtime pay requirements, creating the potential for disparate treatment or disparate impact claims or requiring reporting to the United States Citizenship and Immigration Services for foreign employees.
But according to the white paper, unless prohibited by an agreement or state or local law, an employer typically has all the flexibility necessary to reduce salaries in times of crisis.
At Origin, Episcope said division leaders have opted to send more of their salaries down the ladder to their teams, while he and his partner take no salaries at all. For employees at lower tiers, these sacrifices make their concessions that much easier to accept. But one thing employees continue to want is more clarity. At present, that can be a hard thing to offer.
“Right now, we can only promise that we will communicate and update everyone until we are clear that we’re on the others side of this," Episcope said.
"This doesn’t mean we won’t lay off people in the future — if the market keeps sliding we’ll do what we need to and make small changes along the way — but for now, we are at a break-even point, and we think we have a good runway," he said. "We’re preparing for the worst and hoping for the best."