The Semco Style 5 Principles to transform the way we work

Salary Cuts Over Job Cuts

Crises don’t last. People do.

It is not socialist, as some of our critics contend. It isn’t purely capitalist, either. It is a new way. A third way. A more humane, trusting, productive, exhilarating, and, in every sense, rewarding way. – Ricardo Semler


IN A NUTSHELL

Crises in the business world are almost never sudden. Instead, they simmer under the surface for long periods before things begin to boil over. And when businesses, their leaders and their employees realize that the crisis is here for good, it’s often too late to make democratic decisions that prioritize the interests of the employees. In short, it’s time for tough conversations, emotional upheavals and the much-dreaded lay offs.

While there’s no denying that the payroll of a company tends to account for the lion’s share of its bottomline, it’s not healthy, in the long run, to lose people, their technical know-how and the company’s overall goodwill. In fact, financial experts who monitored the economic downturn in 2009, touted to be the biggest world-wide economic crisis after World War II, agreed that mass layoffs did more damage than good.  

Having said that, is there a better way for companies to handle cost cuts when crisis hits? SEMCO proved that there is, in fact, a way: Whether it was the crisis between 2002-2005 or the ongoing one in 2017, SEMCO has dealt with the situation by lowering the salaries of its employees instead of laying them off. It was possible only because of the company’s long-standing culture of financial transparency as well as its strong relationship with the worker unions.

 

What

In a crisis, reduce salaries of employees temporarily based on their salary grade instead of laying them off.


Why

It’s a sure-fire way to show the extent to which your business puts its employees first. This practice cannot be a top-down decision – instead, it needs to be an entirely democratic decision that’s implemented keeping in mind the interests of the employees.

At the same time, this practice has some undeniable benefits for the company as well: By choosing not to lay off people in a crisis, the company prevents a lot of knowledge from being lost. And, once things start looking up, there will be no need to recruit and train new employees, saving lot of time and resources for the company.

This practice creates a win-win situation for the employees as well as the company and employee-engagement continues to be high even during a crisis. Implementing this practice will set your company in sharp relief against your competitors, who indiscriminately fire their employees, drastically reduce costs and step up the pressure on the surviving teams.


How

 

Build A Culture Of Transparency: Long before you can implement a practice like this, your company needs to be one that’s transparent about financials. You need to ensure that your employees are educated and kept in the loop about your numbers so that it’s not a surprise when a crisis strikes. Instead, they’d be aware that a crisis is brewing and that tough times are on the cards.

Make Democratic Decisions: The strategy of reducing salaries according to salary grade must come as a proposal from the company leadership to all employees. The leadership and the employees need to align themselves and see if there’s a consensus, or at least a sizable majority, about taking things forward. It cannot be a top-down decision, but one that’s democratically made.   

Be Aware Of The Legal Implications: In a number of countries, it’s against the law for a company to reduce the wages and/or benefits given to employees. However, having the support of the employee unions can be a game changer when it comes to circumventing labor laws. Nevertheless, you must be aware of all the legal implications of reducing employee wages before you actually implement this practice.

Define The Range Of Pay Cuts: It’s important to be fair when reducing the salaries of employees. Reserve higher reductions for those who earn more; and for those who will be really hit by the salary reduction, let there be no impact. For instance, make no cuts for your blue collar employees; make a 10 percent cut for employees in the next salary grade; and for your team leaders, managers and division heads, make a 20-30 percent cut.

Walk-The-Talk: If your company is facing a major crisis and you’re implementing salary cuts for all your employees, it needs to begin with you. This practice will fall flat if the top-level leadership of a company remains in a bubble, untouched by the crisis or the pay cuts. So, you need to be prepared to take (probably the biggest) reduction in pay before you can ask your employees to lose a percentage of their pay.

Restore Salaries Once Situation Improves: When you enforce reduction in salaries, do so with the promise of restoring salaries to old levels as soon as the situation improves. Cumulate the amount employees lost during the period of pay cuts and give it back to them as bonuses. It’s very important to take this promise very seriously because failing to do so will completely demoralize employees and lead to a loss of trust in the leadership.


Level to implement

  Hard


DO’S

Build long-term transparency

Get employees and unions onboard before implementation

Be fair about enforcing pay cuts

Keep your promises to employees

DON’TS

Keep employees in the dark until it’s too late

Reduce or take away benefits

Break any laws while implementing this practice

Pros

Reduces insecurity amidst employees

Retains trained employees during and beyond a crisis

Reinforces team spirit and integrates team on a deeper level

Improves proximity with unions during a crisis

Cons

Emotional upheavals among those who stand to lose 20-30 percent of their pay   

Not everybody might agree with this strategy

Relationship with worker unions need to be good to implement this strategy


CASE

 

Build a company that chooses its employees long before crisis strikes.

Any company is bound to face economic crises throughout its’ existence but the way it handles them will define its success, employee-engagement and overall goodwill. Putting employees first has been at the core of every strategy employed at Semco and the practice of reducing salaries instead of manpower in a time of crisis is just one of them.

Reducing salaries of employees might seem pretty straightforward in theory. But, in reality, it’s much more difficult. It all begins with being transparent and regularly educating employees about the financial situation of the company.

At Semco, all employees – be it be, cleaners, factory workers or managers, are encouraged to follow the company’s numbers and financial data. Every employee is invited to participate in two main meetings – one general and one departmental – where they are kept in the loop about the company’s performance.

In other words, there is a long-standing culture of transparency about the company’s financials, with employees understanding whatever the numbers indicate. So, when a crisis is coming up it’s not a surprise because people have been following the things that lead up to it. For instance, the employees know that the company has been in loss for the past few months and that things aren’t likely to improve anytime soon.

At Semco, whether it was the crisis between 2002-2005 or the ongoing one in 2017, there’s never been a time when people were surprised and had to swallow tough decisions, like job cuts, because the company had waited too long. Instead, the entire workforce and the leaders aligned themselves to choose salary cuts over job cuts.

The strategy at Semco is to leave workers with the lowest pay untouched. Employees in the next salary grade are given a 10 percent reduction in salary and those above them receive 20-30 percent reduction in salary.

The decision to implement this strategy was never top-down: The plan was proposed to all employees and everybody agreed to have their salaries reduced instead of losing their jobs entirely. Of course, the company couldn’t guarantee that there would be no layoffs, but it was clear that the intent was to avoid firing people as much as possible.

The agreement also included the promise that once Semco began doing better and the numbers went up, the salaries would be restored to the previous levels and whatever employees lost in the intervening period would be given back to them as bonuses.

There was a 100 percent consensus to implement this strategy and in the end, no employee was let go. Also, the benefits like health insurance and other allowances given to employees remained untouched throughout the crisis period.  

It was a very transparent and frank conversation between the Semco leadership and employees. The employees knew that there was a crisis so, even though the conversation was a tough one to have, the groundwork for it was laid by the company’s long-term practice of keeping all employees in the loop about its performance.

It’s important to note that implementing such a strategy to reduce costs may not be legal in every country. In Brazil, and probably many other countries, it’s illegal to reduce the wages and benefits given to employees at the time of hiring.

Since Semco was very close to the worker unions, treating them as stakeholders and partners, it had the support of the unions to go ahead with this plan. Armed with the support of both the employees and the unions, they were able to implement this practice instead of losing employees.

This is something that was very unique and symbolic because it revealed the extent to which Semco prioritized the interests of its employees. At the same time, it worked out very well for the company as well: Semco saved a lot of technical know-how from being lost and it also saved the time and effort that would be needed to train new employees when times turned around.

When employees realized that Semco was making them a priority, they reciprocated with increased commitment and engagement. There was an overarching consciousness of the need to survive and many employees reported feeling an increased sense of ownership over the company.

All employees took it personally and acted the way they would have if it were their own home that was in crisis. In the end, it was a win-win situation for the employees as well as the company.

During the crisis, some of the units of Semco were performing better than the others and the directors of the underperforming units weren’t taking home any pay. To solve the situation, the five directors decided to share their salaries among themselves. This was a prime example of Semco leaders walking-the-talk and it created an unimaginably strong bond and engagement levels shot through the roof.


Changemaker

Expert avatar

Borges, Ian

Co-founder at LeadWise | Partner at Semco Style Institute | Entrepreneur | Lifestyle Strategist | Digital Nomad

Rio de Janeiro, Brazil

Portuguese, English, French, Spanish

  • facebook
  • twitter
  • linkedin

Related Powerful Practices

Cutting Costs Without Cutting People

3 Ways to Build Entrepreneurial Resilience for the Next ‘Wave’ of Challenges