Most countries throughout the world are feeling the consequences of the current economic recession.  Many well established companies have already succumbed to these economic pressures and, no doubt, more will follow in the coming months.People in general are fearful that they may lose their jobs.  This is not the first time that the global economy has gone through a recession and it will probably not be the last.  A pattern has evolved - on average it is happening after every 8 -10 years.

So, how do we survive this turbulent period and arrive at the end of recession in a position to move forward positively?  In this time of economic uncertainty, expenditure is very closely scrutinised and individuals and organisations are looking at ways to ‘bridge the gap’ financially.  At the individual level it means cutting back on certain ‘unnecessary’ costs – dining out and entertainment, for example.

Organisations will put a squeeze on their overheads – the biggest overhead is the employee ‘payroll’ and one way to reduce cost is to reduce the payroll.

How do you do this?

Redundancy?  An effective way to reduce overheads, but what are the consequences and costs?  The CIPD has estimated the real cost of redundancy can reach £16,375 per employee laid off, even before hidden costs like higher labour turnover and a fall in staff productivity are added in.  It is urging employers to plan for recovery by retaining their people, rather than downsizing and risking long-term damage to their business.

In an effort to preserve workforce skills, perhaps organisations should consider reducing their overheads by cutting pay.  A contentious issue and one that has to be considered very carefully and communicated effectively with those involved.

In the USA, there is evidence of an increase in pay reductions – one company recently negotiated an across the board ‘payment adjustment’.  Those adjustments were scaled according to current compensation levels with a 1-7% scale.  Executives were slightly higher. No one was particularly happy; however, the response was that it was equitable and understandable.

Communicating the situation straight forward was critical and the employees, in this case, were “somewhat” relieved.  They could see what was happening and feared a layoff.  A reduction in pay was a suitable alternative and the company continued to trade.

Conversely, we have recently seen Waterford Crystal file for bankruptcy after suffering difficult trading conditions for a number of years.  Interestingly, in early 2008 the company lost its case to impose a pay freeze based on their inability to afford it.  The trade union, Unite, secured a 2% pay rise for 1000 Waterford staff during the second phase of the current Irish national pay deal under the ‘Towards 2016′ social partnership agreement.

I pose the following questions:

‘If Waterford were not compelled to award a pay increase in April 2008, would they still be trading today?’

‘In a free market, is it appropriate for government to dictate ‘across the board’ that the national workforce will receive specific percentage salary increases within a certain timeline, as prescribed in the ‘Towards 2016′ document?’

‘If Waterford had negotiated a proportionate salary cut in 2008, would we know find those 1000 employees looking forward to continued employment and not registering with the job centre?’

I am not sure what the legal ramifications are in relation to ‘pay cuts’, but surely it is far more desirable to be able to negotiate a pay reduction, retain your skilled workforce and continue trading than going into administration?

Lance Gill