Cutting leadership pay to avoid layoffs might become a trend, according to a Gartner expert

Recent headlines have made for increasingly grim reading: Seemingly every week has brought news of layoffs, with smaller companies cutting staff alongside Silicon Valley and Wall Street juggernauts. Belying the trend is a strain of copycat thinking, according to Stanford business professor Jeffrey Pfeffer, who recently described the logic among employers as, “Everybody else is doing it, why aren’t we?”

Some companies have responded to the challenging economic conditions with a different strategy—cutting executive pay. Intel, for example, instituted staggered pay cuts for certain executives after an abysmal quarter, while tech giants such as Google and Apple have enacted pay cuts for their well-compensated CEOs. (Google laid off 12,000 employees in January, days before announcing a series of executive pay cuts).

But reducing pay can be a slippery slope in today’s job market, according to Amy Spurling, founder and CEO of perk stipend platform Compt. If you’re going to slash executive compensation, “You have to have high unemployment where people have no choice and they can’t go somewhere else to work,” she argued.

Organizations mulling a decision to cut pay for top brass need to understand the current dynamics of the labor market, sources stressed. As Tony Guadagni, senior principal at Gartner, explained to HR Brew, executive pay cuts can also be contagious: “We see someone like Apple setting the tone…I think it’s likely that we’ll see more of it.”

Starting at the top. Employees seem to believe in a hierarchical approach to salary reductions. According to Guadagni, a recent Gartner survey found that, among 10,080 respondents, 77% believe that senior executive pay should be reduced in order to avoid layoffs. “Depending on what the senior leader is making, [cuts] could preserve quite a few jobs,” Spurling added. Big Tech CEOs, such as Apple’s Tim Cook, have seen their compensation slashed on the heels of economic turbulence; he is projected to make $49 million in total compensation this year after a 40% reduction, according to CNN.

For leaders of smaller companies, the ramifications of pay cuts are often more significant and can signal a willingness to make crucial sacrifices. “It makes a strong statement about their commitment to the organization, about their commitment to their employees,” Guadagni argued.

Tough calls. While navigating the woeful economy during the Covid-19 recession, Tracy Marlowe, co-founder and CEO of marketing and communications agency Creative Noggin, decided to cut her own salary, but soon realized the budgetary constraints would necessitate reduced salaries for her staff, as well. She coordinated a “Zoom conference with [employees] to let them know, and just really explain the situation,” which was motivated by a question of “do we all take a slight pain, rather than have a couple of people have a significant loss?” Instead of leaving her team unmoored during a pandemic without health insurance, she was able to keep them employed. The reduced compensation period lasted around four months, she recalled.

Spurling enacted pay cuts across an organization during the 2008 recession. Pursuing austerity, rather than laying people off with low prospects for employment, made sense at the time. “It was a different world then and I don’t think what we did then would work now,” she explained.

Leading by example. For Marlowe, opting to cut CEO pay to save jobs for the rank and file is a necessary aspect of leadership. “As a leader, I’ve always believed that the first cut should be me,” she said.

There’s a hint of altruism in the move, which might pay reputational dividends down the line, Guadagni said. It “really sets the tone for how people think about the organization, and how they may receive or perceive hard decisions that those organizational leaders might have to make later.”—SB