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Right Way to Cut Pay

Thursday, March 1, 2012
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Back in January, Morgan Stanley Chief Executive Officer and Chairman James Gorman sat for an interview with Bloomberg Television, during which time the topic of recent company pay cuts for senior investment bankers and traders was broached.

When asked what he would tell any employee whose feathers may be ruffled by the pay cut, he responded with the following succinct enumeration: "You're naive, read the newspaper, No. 1.

"No. 2, if you put your compensation in a one-year context to define your overall level of happiness, you have a problem which is much bigger than the job," he said. "And No. 3, if you're really unhappy, just leave. I mean, life's too short."

Short, but definitely not sweet.

As an alternative to being "callous," says Elissa Tucker, a human capital management knowledge specialist at the Houston-based American Productivity and Quality Center, an organization could explain to these executives that the pay cuts are potentially in their best interests.

Tucker says research conducted with colleague Rachele Williams suggests that the message of pay cuts should be delivered to senior executives in a way that minimizes the potential for demotivation and poses less of a threat to future leadership performance.

"Show in detail, for example," she says, "how the organization has determined that the pay cuts will help preserve [their] current jobs and even protect their future employability by sustaining the organization and industry as a whole."

She also recommends company leaders make sure affected employees know the pay cuts were fairly calculated by being as transparent as possible; tying the specific pay-cut percentages to specific, anticipated business impacts; and discussing any alternatives that may exist for preserving -- and even maximizing -- their pay in the future.

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"If all of these steps are taken in a thoughtful way, the potential for [senior executives] to 'buy into' the new employment deal should increase," she says. "Done hastily or superficially, however, these actions are likely to only add steam to the disengaging power of pay-cut messages."

Tucker notes that none of these comments are meant to come across as "critiquing" Morgan Stanley's message because, "in the end, each organization has a unique context that these communication decisions need to be made in."

While that may indeed be true, there's hardly a context in which publicly calling your employees "naïve" can ever be considered a wise move.

Michael O'Brien can be reached at mobrien@lrp.com.

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