Layoffs or pay freezes?

Our company is in some financial trouble and there’s no way around making cuts regarding employee pay. We are still mulling over our options--namely,  whether it’s best to select employees for layoff or to institute a freeze on everyone’s pay. Obviously, we’ve got some number-crunching to do (including determining whether we can function efficiently with fewer employees should we choose layoffs).

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In the meantime, I thought I’d ask--all things being equal, in such a situation do you think it’s better to just layoff some employees and keep the “survivors” relatively happy by not instituting pay freezes?


Or would it be better to send the message—“We’re experiencing tough times: the good news is we are going to be able to avoid layoffs (underscoring that all of our employees are important to us), but the bad news is we can’t afford to give you raises?”


Any insights--particularly from those of you who've been in such a situation before--would be most appreciated! Thanks


  • 3 Comments sorted by Votes Date Added
  • I think pay freezes are preferable to layoffs - especially when it will be very difficult for those laid off to find new jobs.  People, if informed well, understand economic issues and will understand if they are not going to get pay increases this year.  It also ensures that you will have enough manpower to get the job done.  You will need to motivate your employees in other intrinsic ways during these tough times, but that carries minimal costs.
  • interesting question. you have other options so be sure to consider them.  for one you could freeze salaries for everyone but your best performers. another is freeze all salaries and put money toward bonuses for your best performers.  bonuses are easier to manage because they function differently than raises.  a single raise hits your budget every year that the employee is employed by you. you can see how that compounds over the length of service of an employee (that 3.5 percent raise and each subsequent one affects that employee's pay for all their years with you). on the other hand a performance based bonus hits your budget one time. that $10,000 bonus in 2007 doesn't guarantee the employee will be paid $10,000 more in 2008.
  • We chose to do pay DECREASES rather than layoffs...I would have been very happy with a freeze actually.

    That said, what has been stated is that if we meet/beat our budget, a percentage of the excess will go towards incentive/bonus pay. 

    I agree with Regdunlop in the fact that bonuses have a lower cost over time because of the compounding issue.  And they can help in a situation where the great performer decides to kickback for a while on a higher salary than deserved....if they are truly performance based.


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