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The Pay Cut explained from a HR perspective

Pay Cut

Taking a pay cut?

There has been some recent scuttlebutt on the topic of salary, compensation and specifically the pay cut,  around the HRNasty compound and I thought it would make a good topic for discussion.  For this discussion, I will consider salary to be financial dollars and compensation to be an overall package which could include any one of the following:   stock options, benefits, company car, gym membership discounts, and the culture of the company. 

Hopefully, you will not be faced with a decision that will affect your salary, but there will be times when it may be appropriate and unfortunately there may be times when it is unavoidable.  

There are a few scenarios that I would like to add perspective on when it comes to taking a pay cut.   I fully grok the fact that there may be times where I am personally willing to take a pay cut as an employee. 

I personally quit a job and accepted less money for career happiness and job satisfaction with another company:

When I went from corporate America to the Startup world, I took a pay cut.  I was looking for a number of things within my new world, including more challenges, more opportunity, and of course, an individual feeling of equality that comes when you know that everyone in the company is also an owner of the company via the mechanic where everyone has equity in the company.

I would expect to take a pay cut if I moved to a new geographic location: 

If I were a candidate and living in a major metropolitan area like New York or San Francisco and then accepted a new position with a new company in a small Midwest town, the same position will probably pay less.  This scenario usually works both ways.  A candidate from the Midwest, moving to New York will generally receive an increase in pay for the same job because the cost of living is much higher in NY.    

I would expect to take a pay cut if I were making a career change:

If I were going to leave the field of HR after 20 years and move into an entirely different career like accounting or software development, I would expect to take a pay cut.  I am a so-called expert (term used loosely, but hey, after 20 years, you better learn something) in my field of HR, but in software or accounting, I would have the experience of a 1st-year graduate.  Some would argue that my years in HR should be worth something.  I would argue that it is not.  When I look at paying a first-year student, the skill set needed doesn’t require 20 additional years of maturity.  This is an entry-level job and will require entry-level decisions.  My 20 years of experience might enable me to progress up the career ladder a little quicker than my first-year peers, but my salary at the point of entry will be the same.      

Hopefully, the 3 scenarios just mentioned make sense and although the economy may influence these decisions, these are my decisions. 

The below is where reasoning can be a little murky, so I thought I would explain the mechanics because the below are usually not the candidates choice. 

JOB MARKET PAY CUT:

As much as we don’t like to think about our salary this way, the employment market is a lot like the housing market.  In the same way, your home will be worth more or less depending on the demand, certain skill sets will become worth more or less depending on the demand for that skill set.   Let’s say you were being paid $50K for your role in the mortgage industry a few years back.  (I am not in the mortgage industry, so these salaries are only examples.)  The economy hurt the mortgage industry and put a lot of mortgage and financial institutions out of business.  These bankrupt businesses displaced a large number of professionals and the result is a flood of banking from the mortgage and banking industry.  The market for a position that was paying $50K a few years ago may only be paying $40K for the same skill set.  In this scenario, if the candidate was paid $50K a few years ago, and the market is paying NOW paying $40K, as an HR practitioner, I will pay $40K.  I don’t take pleasure in this, but this is a market determination, not a personal bias. In this instance, the candidate is accepting a position that is a match for their skill set, but the salary for this job is paying less.  In this example, the entire industry is distressed.  If a company were to choose to pay all of their employees 25% above the market, (25% of $40K is $10K) then the company would probably go bankrupt. 

Put another way, a house may have been worth $300K a few years back, but if the going rate on that same house is currently $240K, I don’t think you would find very many takers who would be willing to pay $300K (25% above market).

OVERQUALIFIED AND TAKING A PAY CUT:

In this scenario, an overqualified candidate may be willing to take a pay cut to make ends meet by taking a job in which they are overqualified for.  This overqualified candidate is usually “settling” for a position where the level, breadth or depth of experience required is much less than their own level of experience.   The candidate may have 10 years of experience and was working in a senior position but ends up taking a mid-level position that only requires 5 years of experience.  In this scenario, the candidate is overqualified for the position. 

Most companies and I included, would have no regrets asking an employee to take a cut in pay in the scenario where there is a change in a geographic location or career change which results in very little experience.  What I do NOT want to do is to ask an overqualified candidate to take a cut in pay.  This is a situation that I will avoid by simply passing on an overqualified candidate.  The candidate may feel they can do the job in their sleep.  The candidate may feel like the company is getting a great deal with an overqualified candidate but that isn’t how the company feels about the candidate. 

Pay Cut from the company perspective:

  1. I want to hire the right level of expertise for the job because I do not want to hire someone who is going to be bored.
  2. I do not want to hire someone who will feel like they do not need to put any effort into the role.  This frustrates everyone around them.
  3. I do not want an employee in the role that is going to feel resentful because they feel they are not being paid what they are worth.  I realize this is a glass half full outlook.  In the first 6 months, the overqualified employee is happy to be employed after a long stint of unemployment, but in most cases, there comes a time where that employee attitude begins to turn.

I don’t want to hire someone who is taking a cut in pay for a position unless I am offsetting the lower salary with stock options, education, relocation or something else of value to create an equal compensation package.  If you are used to making $50K and come in at $40K because you are unemployed, you will be excited to have a job for the first 6 months, but later, you are going to think. . .  “Shit, I should be making $50K”.  I am being stereotypical here, but the effort will start to slack off and resentment will start to hockey stick up and to the right.  That is HR’s fear, and this is the hiring managers fear, which is why most good companies won’t hire someone for less than they are worth.

When we open a job position, we plan on paying for a specific skill set.  We do not plan on finding someone who is overqualified and willing to take a pay cut.  We are setting the company up for failure and we are setting the candidate up for failure.   

So the moral of the story is that if you do find yourself in a situation where you are being declined or not hearing back when you are applying for a position that you can do in your sleep, position your resume as a perfect candidate.  Not an under-qualified or overqualified candidate.  If the hiring company is looking for 5-7 years of experience and you have 10, give them 6 years of experience.  Give the customer what they want.   

See you at the after party,

HRNasty 

nasty: an unreal maneuver of incredible technique, something that is ridiculously good, tricky and manipulative but with a result that can’t help but be admired, a phrase used to describe someone who is good at something. “He has a nasty forkball”.

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PS.  I would like to establish some baseline assumptions on the way I personally like to operate.  Not every company operates this way.  The following is just one individual preference in a sea of 1000’s.   Within a company’s compensation philosophy, there may be individual departments or hiring managers who can afford to think and act differently from the company philosophy.  This may result from demand on the candidate pool (too few or too many candidates) or the personality of the individual manager (is the manager conservative or aggressive).

The following is how I would like to operate in a perfect world and the emphasis is on the word “perfect”. 

First, let me say that I don’t believe in paying anyone less than they are worth.  As a representative of the employer and an HR practitioner, I personally do not want to work for a company that takes pride in operating at the expense of the employee by saving a few percentage points in salary.  Below are a few reasons why I do not want to pay under market, and creating this list isn’t even making me think or scratching the surface.  This is the VERY short list.  Lower salaries across an enterprise usually translates to:

  • Myself being personally surrounded by an entire workforce of bitter underpaid employees that usually will point the finger to HR.
  • Making it harder to do my job as a recruiter and HR practitioner.  It is harder to recruit great talent when the compensation is lower across the board.
  • Will only accelerate and compound the disease of a poor company culture.
  • Great talent doesn’t need to take a lower salary.  Great talent won’t stick around long when underpaid.  Trust me on this one, everyone thinks they are “great talent”.

All of the above will lead to a vicious circle within a machine whose gears I would just be greasing with more employee talent.   How is that for a visual?

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