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Progressive pay cuts - A silver lining in these dark days

“The Black Swan of 2020” - as Sequoia termed the COVID-19 outbreak in its memo - has created palpable fear and panic in economies. The hospitality and travel sectors have been the worst hit, but the consumer goods companies are not too far behind. Even as Prime Minister Narendra Modi appeals to businesses to protect jobs in this pandemic, Indian corporates have started cutting salaries and perks.


In today's piece, we analyze the steps a few of the firms and their top management has taken, look at why a progressive pay cut makes more sense for everyone involved, and end with analyzing the medium and long term benefits of the move to corporates.


Who has done what?


The Airline and travel industries are worst hit by the pandemic. The CEO of Marriot had a heartwarming message for associates on Twitter late last week. A company that has been through the World War and the Great Financial Crisis marked this as the worst period in its operating history. He also took a 100% pay cut for the year. Back home, Paytm founder Vijay Shekhar Sharma also took a two-month pay cut to support Paytm associates. In the airline space, Indigo had a progressive pay cut with the top management taking a 25% hit, going down to 5% for cabin crew. Apollo Tyres, one of India’s largest tyre manufacturers, announced that its top management will take a cut in compensation, in the range of 15% to 25% due to its declining business in the EU and the USA. A trend common to all of these companies is the top management taking a sharper pay cut than their subordinates in an inspiring example of servant leadership.


Why are Corporations acting as Robinhood?


There are strong reasons why a progressive pay cut makes more sense than across the board cuts or layoffs. A few of the learnings that emerged from the debris of the 2008 economic crisis were the following:

● We may be seeing the worsening labor market in India, one of the most important contributors to poverty increases after 2008 in the EU and USA. Labor accounts for most household income in India and hence, it is the greatest source of vulnerability for low-income households. No amount of social assistance can compensate for the long-lasting effects of long-term unemployment and inactivity associated with a crisis.

● The lowest earners are also most vulnerable because a layoff pushes the young people in the family to leave formal education and training thus preventing them from acquiring marketable skills.

● Absence of minimum income programs, social assistance or medical insurance increases their vulnerability during these shocks.


An analysis of the spending pattern of different consumer groups indicates that poor families spend a much larger share of their budget on basic necessities such as food at home, utilities, and health care while the rich are able to devote a much bigger chunk of their spending to education and saving for retirement (16%, compared to 2% by poor families, according to the Bureau of Labor Statistics, USA). When people make money they spend firm on the essentials, food, clothing, rent, and utilities, and then move the rest towards discretionary spending and investments. While the spend does go up on these essentials as you progress through your career, there is a cap on how much you can spend on it. Most top white-collar professionals will, therefore, find themselves having a large chunk of their income go into their savings or discretionary spending.


A short term pay cut will, therefore, put a minor dent in the entertainment and savings corpus for someone who belongs to the top management while it forces the lowest earners to cut back on necessities. The well to do have their savings to fall back upon, a luxury not available to low-income households.


From a utilitarian perspective, the idea of progressive pay cuts is deemed as “ethical” since the group that can afford to contribute more is bettering the lives of the vulnerable who otherwise would have been exposed to harsher conditions.


Are there any benefits for companies?


While leaders are responsible for cost-cutting to keep companies afloat, handling this crisis in a clear and compassionate way may create more value for their companies and help them come out of this pandemic stronger than ever before. Using a progressive pay cut to help protect the low paying jobs will help foster trust and uphold values espoused in the corporate principles.


This process can be further strengthened by clear communication about the turbulent times facing the company and involving employees to crowd-source cost-cutting initiatives. This pandemic also presents companies with a great opportunity to improve employee morale and engagement - according to research by Gallup, whether a company or team has the person’s back is one of the important factors which predict employee engagement.


Last, but not the least, when treated as an alternative to layoffs, progressive pay cuts are better. Layoffs sometimes provide short-term relief, while hurting companies in the long-term. An American Management Association study in 1996, found that fewer than half of the firms that downsized subsequently increased their profits, and only a third reported higher productivity.


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About the Author: The post is written by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.

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