Managing Pay-Cuts with Equanimity

Events like the one we are witnessing occur less than once in twenty years. The half-life of public companies is ten years and for startups it is three years. This means that most individuals who are CXOs or entrepreneurs today are unlikely to witness an event of this magnitude in what is left of their career. Therefore, it is important to deal with it through a combination of clear thinking and decisive action.

The investment mood is extremely somber and everyone is in a wait and watch mood. Most astute investors and bankers who have been through a similar crisis are advising conserving cash at all costs by cutting costs, reducing salaries and pruning manpower. The remaining nine months of this calendar year can be pretty much written off and startups that thought they had a long runway before raising the next round are suddenly realizing that the runway has shrunk dramatically. 18 months could come down to as short as 3 months unless they act decisively and immediately.

As a founder, you should model this quickly based on 3-4 scenarios. Take actions based on the worst case scenario for the simple reason that when things begin to spiral downwards, the outcomes will always be worse than you initially imagined.

First look at individuals who you recruited at salaries that were ‘over the top’ and whose contributions are questionable to evaluate whether you need to take some hard calls. Then look at pay-cuts. A slab-wise pay-cut with a higher percentage of cut at the higher end is generally considered more equitable than an across the board flat percentage. And do ensure that the cuts are computed the way income tax is computed, which is the rate-cut at the higher slab is applicable only on the incremental salary above the maximum of the previous slab. This ensures that it is equitable. The pay-cut could apply for say 6-9 months after which it could be reviewed based on how things unfold.

You should also look at compensating your employees by granting them options at a discount to the current price (between say 25%-50%) whose value is equivalent to the loss in pay. This is also an opportunity to look at providing some liquidity to employees with vested options by tying up with firms like ‘LetsVenture’.

Besides salary cuts, you should look at a hiring and travel freeze, negotiating with landlords for waiver of rentals, giving up expensive office space in lieu of work from home, etc.

Communication is key but there is no rocket science to it. Be honest, don’t obfuscate, answer questions honestly. Most employees will understand when they see that leadership is doing this with the intention of preserving the business and surviving through these tough times. When they that leadership is taking the biggest pay-cuts, the trust level goes up.

Will some key people leave? In all likelihood, they won’t because they will understand and also realise that there are very few companies exempt from the impact of the pandemic. And even if a few do leave, see that as an opportunity to promote young people with potential into key roles and stepping up their salaries.

People with high EMIs may be worried about defaulting. But this is not the first time in history that will see layoffs and pay-cuts. These have happened every now and then though may not be as widespread as it is now. Banks are discussing how to prevent large-scale defaults by allowing deferment of instalments by a quarter or two. Individuals need to discuss with their banks and landlords. People need to cut down on spending and what is there to spend on in a lockdown anyway!

If things improve, and we hope they do soon, and you survive and emerge with limited bruises, then you could look at reinstating the original salaries and giving out goodies.

If you are struggling to take the tough calls, and worried about what pay-cuts will do to the lives of your colleagues, remember the battle of the Mahabharat. Arjuna grappled with a similar problem. Find the Krishna within, detach yourself sufficiently and take the hard calls in the interest of the greater good!

All the best!