Written by
Changeboard Team

Published
16 Aug 2012

How to administer pay cuts in times of austerity

16 Aug 2012 • by Changeboard Team

Pay cuts across the Eurozone

The move is intended to reduce the €8.3 million annual cost to Spanish taxpayers of keeping them by some €100,000.

Leading the way is the Spanish King, Juan Carlos, who will take around €20,000 less from the public purse, while his son Prince Felipe will likewise receive around €10,500 less than was formerly the case.

At first glance, the numbers seem small, but they amount to a 7% pay cut for each individual member of the royal family– a figure roughly comparable to the amount that public sector workers have been asked to forego as Spain seeks to implement a €65 billion austerity package pushed through parliament by the People's Party.

But it is not just Spanish public sector workers who are feeling the pinch. Across the Eurozone, civil servants are being asked to accept pay cuts, changing shift patterns and reductions in bonuses and perks as governments seek to achieve huge budget savings.

Here in the UK, public sector workers have been coping with the grim realities of austerity for some time and there appears to be little light at the end of the tunnel.

Last week, it was reported that managers in 19 NHS organisations were planning to impose pay cuts of up to 5%, coupled with the abolition of overtime payments for night, weekend and bank holiday shifts as well as a change in working hours.

Controversial moves such as these are always likely to provoke an angry response - the austerity moves announced in Spain last week sparked mass protests as trade unions called on their members to take to the streets, for instance.

Controversial measures

Some 50,000 civil servants protested in Madrid and tens of thousands of others gathered in other major Spanish cities last Thursday.

But however difficult, the Spanish cuts are a grim necessity. The cost of its borrowing is continuing to rise amid ongoing uncertainty in the financial markets over whether the country can successfully reduce the size of its debt.

The austerity measures being introduced by governments across Europe are also being reflected in business, however, with employers being hit by tough market conditions and many finding it difficult to hit budget forecasts.

Faced with earnings shortfalls and rising costs, a good number are contemplating similar austerity measures to those adopted by public sector organisations such as the NHS.

But implementing controversial proposals such as wage cuts, changes in hours and reductions in bonuses is not an easy task, although it is possible: When confronted with the alternative of mass redundancies or even business closure, many employees have shown themselves amenable to – or at least accepting of - change.

For many organisations expecting to see reduced profits, or even losses, amid tight trading conditions, the options are limited. Redundancy is a common consideration if employers believe that they can maintain productivity levels with fewer staff or wish to shut down less profitable or loss-making departments in order to focus on those that generate greater revenues.

But redundancy programmes can be difficult to implement and may not solve all of the problems being experienced. As a result, leaders are increasingly, looking to cut costs while trying to maintain output and it is here that changes to staff pay and conditions can play a part.

A key consideration if going down this route, however, is that imposing pay cuts or altering pre-agreed annual pay adjustments represents a change in employees’ terms and conditions of employment. This means that it cannot be imposed unilaterally.

Constructive engagement

Any attempt to force a pay cut through in this way is likely to be met with union action and could lead to employees claiming constructive dismissal at an employment tribunal.

It is, therefore, essential to take good legal advice prior to implementing any such proposals.

The most constructive way to introduce changes to pay, however, is to engage the workforce directly in a discussion about the company’s future. If people are aware of the challenges that their employer faces, they are more likely to be receptive to proposals that could result in lower pay.

If staff are unionised, also consider discussing proposals with union leaders early on in order to avoid costly disputes at a later date.

Taking the lead with an unpopular or controversial company policy is likewise always advisable. Personnel are more likely to be receptive to changes in their terms and conditions if they feel that management and the board have done so first.

Making sure that changes are equitable and that hardship is seen to be shared throughout the business is one way to ensure that directors’ pay cuts are respected rather than ridiculed.

Another option to try and soften the blow is to offer employees incentives in other areas. For instance, some staff may be happy to cut their hours, so implementing a voluntary part-time working regime may be one way to cut costs without losing personnel.

Another means of incentivising people is to offer a share ownership scheme in return for loyalty. This approach also has tax advantages for employers and encourages personnel to buy into the broader goals of the business as their sacrifice in wage terms can be weighed against a greater share in the future success of the company.

But it is also important to encourage those who do accept fewer hours or lower pay to take legal advice as to the potential effect that the decision may have on their financial arrangements. These include working tax credits, other tax incentives and pensions.

Surprising outcomes

For instance, a pay cut will inevitably lead to lower contributions into pension schemes, something that may not suit people nearing retirement age.

Similarly, some tax credits are calculated against hours worked per week so a mother with a young family may find her decision to help the business backfires and results in a bigger reduction in her family income.

Staff should likewise be advised to contact their mortgage lenders and to review any pay protection insurance policies that they have in place – even though any fall in premiums is unlikely to justify altering the policy, especially if the pay cut is temporary.

But it needs to be clear that reducing pay levels and changing terms and conditions is a finite exercise. Employees should be given a future date when the changes will be reviewed or, alternatively, offered a goal to work towards.

Advising staff to accept a 10% cut for the foreseeable future is as good as telling them that the reduction will last forever - something that will not help morale.

Therefore, the best way to implement such a policy is to ensure that employees know why it is being considered in the first place and what needs to happen before wages can be increased again.

Introducing carefully-implemented adjustments to pay and working conditions is entirely possible, and has been achieved by both private and public sector organisations in the UK as well as in Europe and the US.

In many cases, the move can bring about unexpected results. For instance, when councils in the UK were faced with some of the biggest budget cuts in a generation, many found that their workers volunteered to take pay cuts in order to ensure that more people kept their jobs and large-scale redundancies were avoided.

Engendering this sort of attitude to austerity can help to ensure that unpopular measures are implemented successfully - and may even result in greater team spirit and a positive attitude to the hardships that everyone is having to face up to.