Why executive pay cuts could be the ‘bold move’ your organisation needs

The reduction of top executives’ salaries provides HR with the opportunity to strengthen employee morale and retention during a period of layoffs.
By: | February 9, 2023

As concerns over a slowing economy drive continued layoffs, particularly in the tech industry, individual contributions are not the only ones feeling the impact. In the last few weeks, a number of large firms have announced pay cuts for their highest-paying executives, creating what experts say could be an opportunity for HR to boost employee morale, and ideally, drive retention.

Among the high-profile execs who will be taking home a lower salary are CEOs from Morgan Stanley, JPMorgan Chase, Apple and Goldman Sachs. Google CEO Sundar Pichai also reportedly told employees in a townhall meeting, held after companywide layoffs, that he and other top executives would be taking a pay cut this year.

Although the gap between CEO pay and that average employees still remains massive, Christopher Pappas, Founder of eLearning Industry, a publishing platform for corporate training, says lowering executive compensation is a “bold move” that could send an important message to employees about company culture.

“It signals to employees,” he says, “that their leaders care about their staff and the success of the company, so much that they’re willing to sacrifice their own pay.”

Pappas notes that such cuts could be a particularly powerful tool to build trust with employees, given that a recent Edelman report found that nearly a quarter of employees surveyed do not trust their employer.

“These salary cuts help executives prove that they are striving to strengthen relationships with those they oversee by working alongside them, not just above them,” Pappas says.

And, according to a new research from Gartner, it is a move many employees are expecting. In a survey of more than 10,000 employees at the end of 2022, less than one-third said they would take a pay cut if it meant avoiding companywide layoffs, and those who would say they would only be willing to accept a diminished salary for up to three months. However, 77% of those surveyed said senior executives should be open to a “significant” pay cut if it would mean the organisation could avoid layoffs or having to reduce salaries of individuals contributors.

READ: Josh Bersin: Let’s talk about layoffs and how to handle them

Kathleen Quinn Votaw, CEO of recruiting and human capital consulting firm TalenTrust, points to Dan Price, former CEO of credit card processing firm Gravity Payments, who in 2015 reduced his salary by more than US$1 million and raised the company starting salary for all employees to $70,000.

“He did it for one year and was public about it, not everyone was a fan,” Quinn Votaw says. “Yet, his company grew while reducing recruitment issues and attrition. Whenever you put your people first, you will win.”

Maximising the potential of that win could fall in the lap of HR leaders, whom Pappas says needs to be as transparent as possible with employees about cost-cutting measures like executive pay cuts, and particularly how such strategies are being used to soften the blow on employees.

“Although these conversations are often trickly, it’s important to discuss these topics routinely in staff-wide and one-on-one meetings so employees don’t feel side-swept in times of crisis,” he says, noting leaders and managers should also be prepared to seek—and respond to—employee feedback. “This is especially important during economic low points, since that’s when employees are most likely to raise concerns about compensation and job security.”

Quinn Votaw says this is a prime opportunity to train teams on how to manage expenses. She advises HR to ask leaders and managers about their essential and non-essential expenses, along with needed (and unnecessary) resources. Two leaders at her organisation, she notes, recently presented viable expenses-reduction ideas, based on the needs of their departments.

“If we are all in this together, then expense reduction is an important matter for the health of the business,” she says, noting another former employee taught her what she calls one of the most valuable leadership lessons: Your people will help you solve your issues. So, listen to them. “She said we all had to share the highs and lows, that’s what a team does.”

Regardless of the strategy an organisation takes to dial back spending, some may be relying more on remote and contract workers, for instance, HR needs to be attuned to the potential impact on company culture, Pappas says.

A recent eLearning Industry study found that more than half of employees surveyed said their leaders are out of touch with what the workforce wants from company culture, and 45% said leaders do not understand what motivates their employees.

So, Pappas says, it is a mistake to think that a one-time move like a high-profile executive pay cut can alone fuel company culture for the long-term.

“Employers should continue to make strides towards strengthening employee morale even during financial hardships,” he says. “Through ongoing conversations on pay and benefits, continuing DEI and L&D initiatives, and promoting flexibility, employers can help their staff build connections without breaking the bank.”

About the author: Jen Colletta is Managing Editor at HRE. The article was first published on Human Resource Executive.