Is unpaid leave the best way to reduce costs during the Covid-19 crisis?

The Covid-19 crisis has caught us all in surprise and almost overnight, it mandates quick and sharp business decisions to keep companies profitable, or even worse – afloat.  Although the situation is complex, the challenges facing business are straight forward: many times revenues are declining while future income is uncertain leading to immediate need to reduce costs – and painfully, people are at the heart of the most cost cutting solutions.

42% of Tech companies in Israel have sent or plan to send people out on unpaid leave

It seems that many companies choose the path of unpaid leave to cost cutting. According to a survey done by Viola covering 74 IL Tech firms 42% have sent or plan to send people out on unpaid leave. There are some clear advantages to unpaid leave – the reduction in cost is complete and immediate, and the employee who leaves can earn a living in another way (even though he/she might make much less).

There is no easy solution to this challenge and the unpaid leave is perceived as “the lesser of two evils”, and in a way “clears the employer’s conscience.”

As a result of people working from home, some positions became naturally redundant

And it is not only the obvious positions like the traveling manager. Most of the world’s enterprises are cutting their expenses which directly lead to reduction in work and less people needed. Some companies are changing their strategies, or their roadmaps, leading to further redundancies and role changes.

It is hard to foresee if it will be possible to bring back all the people who went on leave when the crisis is over. We still do not have clarity on how long the crisis will last and what the exit strategy will be, and it is not unreasonable to assume that many of those who went on leave will not be available once called to come back. Therefore, this solution is especially suitable for companies that employ profiles which are not difficult to recruit.

We are dealing with a crucial decision thus we must take into account all the relevant considerations

I believe that in many cases a temporary, cross-company pay reduction, might be more effective than unpaid leave. It is important to put a disclaimer- many companies do not have a real choice, sometimes it is illegal to reduce pay, there are international companies where the instructions are coming from overseas. In those cases unpaid leave avoids immediate dismissal. But in many other cases, companies have the ability to make a true discretional choice between the two alternatives.

Many are familiar with the dilemma between reduction in force and cross-company pay reduction during times when business is tough. On regular days, the two alternatives have both advantages and disadvantages, but we are currently not in regular days. Every case is different, but I believe that during this unprecedented crisis, there is a meaningful advantage to temporary cross-company pay reduction as it conveys a message of solidarity, which keeps the team together, and leaders can provide personal examples, especially when the percentage decrease among management members is higher.

Positions which become redundant should be removed, you should also not tolerate a low level of performance, but beyond that, for a large part of the cases, pay cuts are the right thing to do nowadays. I also believe that most of the people will accept and embrace this move- it is not easy at all to give up on a substantial part of your pay, but on the other hand, in actual fact, many people are not working full time from home (sorry for the generalization) and maybe, while stuck at home, we are spending much less anyway… It sounds like a strange argument, but so much is strange right now Isn’t it? 

There is a real advantage to temporary cross-company pay reduction as it conveys a message of solidarity, which keeps the team together

Companies that will take this road – taking responsibility as an employer rather than handing the burden to its people or to the government – are likely to earn the trust from their people who care more of their job right now than their pay level. 

Keeping the team intact can enable companies to be better prepared for the day the crisis is over. First, they will have their entire staff intact and ready for growth. Also, their positioning and brand in the employer market as those who took care of their people during the tough times will be stronger than those who sent out their people to unpaid leave- an act which might be perceived as “turning their back” on employees during times of crisis. Pay reduction is especially suitable for companies that employ profiles which are very hard to recruit.

Many feel that the Y and Z generations do not really care for solidarity and will not remain loyal to a company that took care of them during tough times. This is controversial, impossible to predict, and maybe this crisis might change the existing engagement patterns between people and companies, who knows?

Good luck to all of us during these challenging times.