Corporate Corruption and the HRM Function: Legal, Ethical, and Moral Perspectives
February 12, 2025
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Recessions and downturns are part of a normal business cycle. When business is booming, corporations tend to hire more people than they need. This is the reason why these same corporations are later forced to lay off some of their employees during periods of recession.
However, layoffs are seen as being inherently negative. Companies that indulge in routine layoffs are often portrayed as being inhuman and materialistic. This is the reason why several companies have started replacing layoffs with pay-cuts for all employees. The financial effect is about the same in both the cases. However, whilst layoffs are viewed as being a PR disaster, pay-cuts are not. In this article, we will compare both pay cuts as well as layoffs to find the pros and cons of both.
Corporations can save the same sum of money via pay-cuts that they would have done by laying off people. Only the human cost is less. There are no devastated families, no suicides, and no foreclosures and so on.
In fact, companies may end up saving money by using pay-cuts instead of layoffs. Companies have to spend a lot of money on public relations after they lay off people. Also, some companies are contractually bound to pay severance money. All this can be simply avoided by forcing employees across the board to take pay cuts. However, for the process to be fair, the employees at higher levels must sacrifice a greater portion of their income.
For instance, when pay cuts were used in Las Vegas-based Wynn Corporation, employees with a salary greater than $150,000 took a 15% pay cut whereas employees whose salaries were lower only took a 10% pay cut.
Given the fact that job losses can be stressful, this is also the time when a lot of people end up incurring medical expenses. The government has to pick up the medical bill and also make welfare payments to the unemployed people. In the case of pay cuts, since nobody is out of a job and they all still have insurance, the government has to spend a lot less money.
On the other hand, if you are a non-productive employee, there will be no offers for you from other companies. Hence, over the long term, most productive employees will leave the company. Only the non-productive ones will be left over. This is the reason why companies tend to prefer layoffs over pay cuts even though the former turns out to attract more negative attention.
An ailing company needs to get rid of non-productive employees. When they choose pay cuts over layoffs, they do the exact opposite of what needs to be done. Hence, instead of solving a crisis situation, they end up creating a newer, bigger crisis.
To sum it up, pay cuts may be better if the entire economy or the entire industry is facing economic challenges. This will ensure that high performing workers do not get better opportunities outside. Hence, the company will be able to retain its talent, save money and also not attract any negative attention. However, if the other companies in the industry are doing well, and a pay-cut is announced, it is like an open invitation for them to poach your best talent.
Just like other corporate decisions pay-cuts vs. layoffs cannot really be decided in a vacuum. The external situation does have a huge bearing on the decision.
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