Current economic conditions are plainly terrifying and short-term prospects are not encouraging. Most employees in most companies are worried about their personal employment prospects and with good reason. This current pervasive atmosphere cannot be ignored or avoided as the reality of the economic situation is detailed every day in the news announcing multiple plant closings, massive layoffs, downsizing, and other employment affecting information. There are currently many cheerleaders promoting the idea that an economic bottom has been reached and an economic recovery is imminent. It may be best to remember that cheerleaders are on the sidelines, and stay on the sidelines, while the players are competing on the field. Cheerleading comes without injury while it is the competitors who will get injured, battered, and bloodied. In spite of the flamboyant gyrations of the cheerleaders it is the players who will tell you how rough the game actually is.

It is almost impossible for any company to escape the current economic decline and the associated negative consequences. Regardless of how well managed any individual company may be there are basic realities that are inescapable. The principal reality is that a reduction in revenue causes lower gross margins and operating losses. Few companies offer a product so unique or a service so unique that it can be unaffected by the overall contraction in the GDP. As a result all companies are facing the same problems in this downdraft, which are less revenue, increased competition, lower prices, and a need to improve productivity.

The challenge is to lower costs sufficiently to achieve cash breakeven at the reduced revenue level while increasing productivity. The immediate requirement to reduce costs is not easy. Frequently external pressure forces the management of the company to make decisions that they may not fully agree with. Outside forces such as the banks and other lenders exert pressure on the business and frequently take the position that if costs cannot be reduced rapidly and dramatically support by the lenders will be withdrawn. This compels the company to save and generate cash, and quickly, or the company will cease operating. Most companies are currently experiencing this squeeze with some very good companies with very good and experienced management closing. The management of a company in this situation must look to save money immediately and the obvious area that this can be achieved is in the area of employment levels and employee benefit costs. It is necessary to reduce the number of employees and reduce the cost to the company of those employees that are retained.

Generally by the time that the management of any company must reduce the pay and benefit levels for the employees there has already been layoffs and the employee population understands that the company is in a perilous situation. The employees know that either the company needs to reduce costs, or shut down, and that additional layoffs are imminent or, as an option, pay and benefit cuts must be implemented. All of these actions are required to lower the cash break-even of the company. It is at this point that the management of the company should submit a plan to the employees that will includes wage and benefit rollbacks.

This sense of reality that the employees possess, forced upon then by the news media, should not be interpreted that the employees are going to immediately or enthusiastically embrace any pay or benefit cuts. They may be able to understand that such action is necessary but the conduct of management and how this necessary action is presented to the employees is the key to maintaining morale and sustaining productivity.

This is a time when the words and music need to match. If pay and benefit cuts are necessary they must occur throughout the entire company, without exception, and the pay reductions should be greater at the top of the organization rather than at the bottom. For example if senior executives would take a 25% pay cut while those at the bottom take a 10% pay cut there will be more emotional support for the program within the company and greater respect for management. From a pragmatic point of view the amount of cash saved by a company when senior management takes a significant pay cut generally equals the amount of money saved when many employees at low pay rates take a 10% pay cut. As the object is to save cash, greater reductions made at the top par rates will conserve more money. Over and above the cash saving benefits of this action the leadership demonstrated by this action will be seen, and applauded, by all employees.

The need for the words and music to match must be restated. In the past the management of too many companies have said one thing to employees, then done something else, which is uncovered at a later time. If management of a company wants to maintain productivity levels and maintain morale during these difficult times absolute candor is necessary. At some companies the hourly employees and the management staff experienced the same percentage reduction in pay, which is a misguided decision. Senior management should experience a higher percentage reduction in pay. Also if it is necessary to reduce benefits these reductions must be experienced company wide and for all employees without exception. Do not make the mistakes of saying one thing and doing another or implementing changes to management compensation that is different from hourly compensation.

Perhaps the loudest argument that a CEO of a company forced to reduce pay levels and reduce benefits will hear will arise from those managers that possess golf club memberships. There will be an unearthly cry from any manager whose golf club membership is placed in jeopardy. This is a problem that needs to be addressed early, as the employees will eventually discover the truth. If you lie to the employees at this time, when the truth is later uncovered, as it inevitability will, the existing management will never again be trusted by the employees of the company.

Analyze this situation again and from the point of view of the lower paid employees. The company is trying to survive and reduce costs while increasing productivity, maintaining quality, and servicing customers. Management says that “we are all in this together” and the pain should be shared equally. Why? To save the company and to ensure that the company, and the jobs, will be there when the economy improves and the pay and benefit cuts can be reinstated. This is a necessary and good plan but it must be honest. At this time perceptions become reality. If the employees discover that during this difficult time when their drug plan had been eliminated golf club privileges were not suspended, management will need to prepare for the backlash, as it will come.

This is a difficult situation for both the management of a company and all of the employees of that company. If the situation is handled openly and fairly, without any exceptions, it can be managed and the necessary goal of realizing wage rollbacks and benefit reductions achieved. Employees of good companies want to work for that company. They will be prepared to make sacrifices to ensure their long-term employment. Morale can be maintained with some effort during these times if the employees are kept informed of the evolving situation and all employees are treated equally and fairly. In this environment employees will also try to increase productivity, and if properly led and managed, will achieve improvements in productivity. In this situation if the employees are misled the negative consequences will be severe and immediate.



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