Between A Rock and A Hard Place: Unemployment or Pay Cut

The lesser of two evils: a pay cut or a layoff? Richard was a software engineer at a Vancouver computer company. His firm, a small one with about 20 employees, was going through tough times as a result of the tech slump.

In the back of his mind there was always a nagging feeling about how that might affect him in the future.

One day he found out. His boss called him in to his office and said, “Richard, this is difficult for me to tell you. But I must offer you a tough choice today. As you know, we’re struggling to break even here. So I’m offering you the option of either a 15-per-cent pay cut or a layoff with a small severance package.”

Yikes, gulped Richard. His worst fears had been realized. He had worked there for five years. His first thoughts revolved around the financial implications of this “choice.” A 15-per-cent pay cut made a lot of difference to his take home pay. With a stay-at-home wife and small child, could he afford a cut as drastic as that?

On the other hand, he enjoyed his work and got along with his colleagues, making unemployment a highly unpleasant prospect. And Richard had never been unemployed.

The prospect of losing the collegiality with his co-workers, the loss of the daily structure his job provided and the disappearance of various benefits – then having to finding a new job – was daunting, especially in the current environment.

In a tough economy, some employers are offering their employees this difficult decision. When people are faced with this situation, they view it as the lesser of two evils.

Clearly, neither prospect is desirable. Each presents its own problems and dilemmas that range far beyond the financial.

At first, however, the financial aspect is front and centre in the affected employee’s mind. Let’s say Richard accepts the layoff and severance package. Financially, he’s fine for awhile.

But what happens after the money runs out? He thinks about that and panics.

He thinks about the other implications too. Being laid off is all about loss. Along with the obvious loss of financial means, layoffs bring a loss of status, security, prestige and identity.

Often, but not always, men succumb to this feeling particularly strongly. “What do you do?” is a common cocktail party question. Richard, who has been in the job market for 20 years, dreaded that question but knew he had to brace for it.

Layoffs, we have found in our practice, attack a person’s sense of self worth. Although the boss expresses the layoff in economic terms, there is a nagging feeling in the mind of someone like Richard that it was more: that he wasn’t cutting it somehow. Why didn’t his colleague down the hall lose her job?

Unfortunately, feelings of inadequacy can accompany a pay cut too, even though the employee technically hasn’t “lost” his or her job. But someone like Richard, if he takes the cut, will have lost substantial financial means and may feel as if he has just been demoted, even while still performing the same function.

The loss of face from a pay cut can be just as intensely felt as that from a layoff. The worker may interpret his pay cut as a sign he wasn’t doing his job properly.

Again, the worker may ask: “Why me?” Richard thought about taking the cut and wondered how he could walk into work each day and enjoy it the way he used to.

Employers must be aware of these realities and be careful not to frame a layoff or pay cut as a sign of incompetence. Telling staff up front that economic uncertainty is the reason for layoffs or pay cuts can reduce the tendency to take the company’s problems personally.

Employers should stress the economic factors that led to their offer of this painful choice: The Sept. 11 attacks, perhaps, the ensuing stock market crash, the problems in the technology sector. And, if possible, they may be able to tell employees who opt for the pay cut that salaries will be reassessed once the company’s bottom line improves. But they had better be prepared to deliver on that promise.

Jock Finlayson, vice-president of policy and analysis at the Business Council of British Columbia, which represents large B.C. employers, says that while pay cuts aren’t a huge trend, there have been instances in the past few years where they have occurred, especially in the food industry. “Non-unionized companies such as Jim Pattison’s grocery chains have put pressure on unionized grocery chains. So we’ve seen contracts negotiated in which the new hires come in at a lower pay scale.”

Finlayson says that another tactic employers are using to save money is the imposition of a reduced workweek. “Workers would work for four days and get one day of employment insurance.” But he says this is not common.

One problem with pay cuts, says Finlayson, is that it can have an impact on the employer’s ability to recruit and retain qualified staff. An employee, feeling he or she is highly skilled and undeserving of a reduction, may walk across the street to a competitor, he says.

That is an important consideration in sectors of the B.C. economy where labour shortages are serious issues due to an aging population, better opportunities in other jurisdictions and other factors, he says.

Staff morale is a casualty of both pay cuts and layoffs. “In larger companies, morale may suffer through pay cuts,” says Finlayson. “But in smaller firms, where everyone knows one another, layoffs would likely hurt morale more. One day the person next to you is there, the next day he’s gone.”

Employers would be wise to view pay cuts or layoffs as a last resort. If not properly handled, they run the risk of legal action. But even if that doesn’t happen, pay cuts and/or layoffs can trouble a workplace. And that can lead to less productivity and a blow to the bottom line that pay cuts or layoffs were supposed to redress.

In the end, Richard left. The emotional impact of the cut stung too much. And he thought, “I have lots of experience, I am skilled, I know of other companies who are healthier and who are looking for staff.” So he moved on and shortly after, found other work.

Dr. Jennifer Newman and Dr. Darryl Grigg are registered psychologists and directors of Newman & Grigg Psychological and Consulting Services Ltd., a Vancouver-based corporate training and development partnership. They can be contacted at

Identifying information in cases cited has been changed to protect confidentiality.

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