Pay Cuts Become a Tool for Some Companies to Avoid Layoffs

It was late and Martin A. Kits van Heyningen feared he was letting the team down at the company he co-founded, KVH Industries. Rather than lay off workers in response to the coronavirus pandemic, he had decided to cut salaries, and when he emailed a video explaining his decision at 3 a.m. last month, he was prepared for a barrage of complaints.

Instead, he woke to an outpouring of support from employees that left him elated.

“It was one of the hardest things I’ve done, but it turned out to be the best day of my life at work,” said Mr. Kits van Heyningen. “I was trying to keep their morale up. Instead, they kept my morale up.”

Even as American employers let tens of millions of workers go, some companies are choosing a different path. By instituting across-the-board salary reductions, especially at senior levels, they have avoided layoffs.

The ranks of those forgoing job cuts and furloughs include major employers like HCA Healthcare, the hospital chain, and Aon, a London-based global professional services firm with a regional headquarters in Chicago. Chemours, a specialty chemical maker in Wilmington, Del., cut pay by 30 percent for senior management and preserved jobs. Others that managed to avoid layoffs include smaller companies like KVH, a maker of mobile connectivity and navigation systems that employs 600 globally and is based in Middletown, R.I.

The trend is a reversal of traditional management theory, which held that salaries were sacred and it was better to cut positions and dismiss a limited number of workers than to lower pay for everyone during downturns.

There is often a genuine desire to protect employees, but long-term financial interests are a major consideration as well, said Donald Delves, a compensation expert with Willis Towers Watson.

“A lot has happened in the last 10 years,” Mr. Delves said. “Companies learned the hard way that once you lay off a bunch of people, it’s expensive and time-consuming to hire them back. Employees are not interchangeable.”

A recent study by the Conference Board with Semler Brossy, an executive compensation research firm, and Esgauge, a data analytics firm, found that 537 public companies had cut pay of senior management since the crisis began. The study did not specify whether any had also cut jobs, however.

To be sure, if the crisis lasts longer than expected and the economy keeps shrinking, it is possible these salary reductions will not be enough to stave off job cuts. Other large corporations have cut salaries as well as jobs to stem coronavirus-related losses.

Still, the sudden nature of the economic threat has created a different mind-set among some managers than existed during the last recession, Mr. Delves said. Some companies did try to cut pay rather than jobs back then, but the impulse seems more widespread now.

“What we’re seeing this time around is more of a sense of shared sacrifice and shared pain,” he added.

When the pandemic hit, HCA was increasing revenue and adding employees, said its chief executive, Sam Hazen, “and to put them out on the street because of some virus just wasn’t something I was going to do.”

With stay-at-home orders covering much of the country and bans on elective surgery in many states, HCA’s hospitals were left with a revenue shortfall. The company suspended its share repurchases and quarterly dividend to bolster its financial position, and it reduced capital spending.

Mr. Hazen donated his salary for April and May to an internal fund for employees in distress, while senior management took a 30 percent pay cut. White-collar employees at lower levels saw their compensation reduced by 10 to 20 percent.

All in all, about 15,000 employees were affected, out of a total of 275,000. The company does not expect the pay reductions to extend beyond June.

HCA also created a pandemic pay program that allowed more than 120,000 nonexecutive hospital employees to receive 70 percent of what they earned before the virus hit. Employees, including union members, are also being asked to forgo a raise this year.

“We needed our people to have as much peace of mind as possible,” Mr. Hazen said. “Our culture is centered on taking care of our employees. This is an opportunity to further differentiate our culture with our people and with our communities.”

Aon, with 50,000 workers around the world, was even more aggressive about reducing salaries. Top executives there gave up 50 percent of their pay, with most remaining employees getting a cut of 20 percent.

“We wanted to say no one would lose their job because of Covid-19,” said Greg Case, Aon’s chief executive.

Mr. Case said he was heartened because overseas employees, who had the right to reject the salary cuts, overwhelmingly accepted them. About two-thirds of Aon’s work force is outside the United States.

But Mr. Case said the company was bracing for long-term disruption. “The risk on the horizon is potentially much greater than 2008-9,” he said. “We are preparing for scenarios that are multiples worse than that.” Aon says the need for the pay cuts will be reviewed monthly.

Avoiding layoffs will leave Aon better prepared for when the economy does rebound, Mr. Case said. “When clients need us most,
we will be there,” he said.

Certainly, for chief executives and the highest-ranking officers, salary cuts are not as painful as it would first appear. That’s because for most, the bulk of their compensation comes in stock awards, said Amit Batish, manager of content and communications for Equilar, a private research firm that tracks executive pay.

“Salaries are a drop in the bucket for most executives, but it does send the message that we are helping out the organization,” he said.

Still, the fact that a few companies were able to avoid layoffs by reducing salaries raises the question of whether more businesses could have averted job cuts in the last two months.

With government unemployment benefits available for laid-off workers, many American companies were quick to cut their work forces, said Kathryn Neel, a managing director at Semler Brossy. “In European countries, where wages were subsidized, they managed to keep more people on the payroll,” she added.

Sharing the pain more broadly this way might have prevented the unemployment rate from hitting its highest level since the Great Depression while also better positioning companies for the eventual recovery.

Firms that cut heavily in 2008-9 were not ready when the economy eventually rebounded, according to Gregg Passin, a senior partner at the human resources consulting firm Mercer. “They lagged companies that were more cautious about cutting people,” he said.

A no-layoffs policy also builds loyalty. “No one wants to be in a situation where their salary is cut,” Mr. Passin said. “But we really do believe the way you treat employees today is the way they’ll treat you tomorrow.”

At KVH Industries, Ronda Vye was not demoralized by the pay cut — she was relieved. Although her 10 percent salary reduction hurts, said Ms. Vye, a director of digital marketing, “it’s manageable and everyone is thankful to know they have a job.”

“I’d much rather take a pay cut than see one of my fellow employees lose a job, especially in this economic environment,” she added. “Where are they going to find work?

Ms. Vye said she did not know how long the cut would last but had told her team it could extend through the end of the year.

KVH is a fraction of the size of Aon or HCA, but Mr. Kits van Heyningen employed a tiered system for the salary reductions at his company. Senior managers took a 15 to 25 percent pay cut, while lower-level employees faced a 10 percent trim. Employees earning less than $50,000 were spared any reduction.

“We’d never done a pay cut before,” said Mr. Kits van Heyningen, who started the company in his parents’ basement more than three decades ago. “A lot of people thought it would be a huge hit to morale.”

But Mr. Kits van Heyningen knew that drastic action was needed as the crisis deepened in March. Much of the mobile connectivity equipment and services that KVH provides is aimed at the maritime market, and the marine electronics dealers that sell KVH products to yacht owners in the United States were unable to stay open.

In Italy, a major boat builder, the economy was likewise closing down. Other companies in the sector had gone bankrupt and Mr. Kits van Heyningen did not want KVH to share their fate.

“We have no idea how long this is going to last,” he said. “The uncertainty is the problem.” To help make up for the pay reduction, Mr. Kits van Heyningen has told employees they can have Friday afternoons off.

John Croy, a software architect, said that he did not plan to take the time off but that he felt it was worth losing pay to avert layoffs. “We’re surviving,” he said. “We’re going to be stronger for this.”

When the initial responses poured in the morning after he emailed the video, Mr. Kits van Heyningen said he felt like George Bailey in “It’s a Wonderful Life,” the 1946 film in which the town of Bedford Falls comes together to support the Jimmy Stewart character and his bank, Bailey Bros. Building & Loan.

In this case, the employees were coming together to support KVH — and one another. “I had hundreds of emails,” he said. “Workers earning less than $50,000 were asking if they could participate. People really feel like they are in it together.”