Cut salaries first?

Fedex announced last week that it is cutting the salaries and freezing contributions to manager’s 401K accounts. Chairman Fred Smith is taking the biggest single hit, cutting his salary by 20 percent. Other top execs will be cut from 7.5 to 10 percent, and the other 36,000 “salaried exempt” staff will take cuts of 5 percent. (See this NPR report).

The more typical response would have been to cut jobs, as many companies have. But as I’ve advocated here before, cutting jobs is probably not the best strategy for the longer term. Yes, this is a bad recession, and it is likely to last through the middle or late next year. Or longer (no one, of course, really knows). But what then – will cutting staff actually put you in a worse position to manage through the recession and then be able to rapidly climb out as the economy recovers.

This is where the salary cuts may be a more effective strategy for everyone in the long term. Owners need take the biggest hit, and don’t be shy about telling your staff that you have done this. In a recent blog, I wrote about the example set by such people as MUSC President Ray Greenberg, who is taking an eight day furlough (non-clinical and non-grant supported staff are taking four days). As a business owner, you enjoy the rewards of the profits when times are good – and the pain of profit decline and losses when times are bad.

Cutting staff will reduce expenses, but the pain will be felt in many ways – short staff, stressed staff, a lessening of the quality of your care for patients, and more tasks that drop to the physician, whose is the key revenue generator. At some point, however, business will pick up and you will then be scrambling to recruit, hire and train people, something that costs you in dollars, time and disruption as the new employee learns how you do things.

If you are faced with having to really cut costs, and personnel is going to be where the dollars are, consider reducing salaries, hours and suspending certain benefits (I would try to save health insurance for last). Bring in your accountant and attorney for advice to make sure that you achieve the results that you want, and that there aren’t any unintended consequences of these moves. Finally, delaying or spreading out furlough days (for example, one day a month over several months) is one way to ease the pain. Another is to allow the use of vacation days, if you would have been calling in a temp to cover. No one is going to be thrilled, of course, and some will be very unhappy and stressed over the income loss that they can ill afford. You can only be as empathetic as possible – you’re trying to save jobs.

Sigh. But that’s why we take on the risks and rewards of management.