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Should you take a paycut?

Updated on August 5, 2013

Many companies are trying to cope with the recession by asking their employees to either take a paycut, or unpaid leave, or both. British Airways went to far as to not only ask employees to take unpaid leave, but to do unpaid work.

The rationale behind this is that if everyone takes a paycut, the firm should survive and not have to make employees redundant. The idea is solidarity to help each other keep their jobs. But should you as an employee agree to this?

Many of the deals with employers to enact paycuts will have been negotiated with unions, and if the unions recommend the paycuts to their workers, it usually means that they've decided that the situation is so dire that only collective paycuts will save jobs.

However, this often leaves individual employees in a dilemma. Many have mortgages to pay, which are based on their full salary. It's hard for them to simply go without a month's pay as British Airways suggested - what happens to that month's mortgage and food bills?.

There have also been instances in the past where the staff have agreed to take pay cuts in order to save a company, but the company was in such dire straits that they went into liquidation anyway, and the staff not only lost their jobs despite the paycut, they lost redundancy payments they would have been entitled to under UK law, which you don't get paid if a firm goes bust. And if the firm doesn't go bust, your redundancy payment is based on your current salary, so a paycut hurts you.

Some firms are offering share options in lieu of salary. But again, while this seems tempting, the share options are only worth as much as the firm's future. If they go bust anyway, you get nothing. Also, in my opinion, it's a mistake to own shares in the company you work for - you are concentrating too much risk in just one company. Employees of Enron found that when the company went bust, so did their pensions, which were fully invested in Enron shares. If they have placed their pensions and savings in the shares of other companies, at least they would have had something left.

What should you do?

Capitalism is a process of creative destruction where some firms go bust in recessions, freeing up resources and other firms thrive, taking up those resources. Even in recessions there are always companies that do well regardless. And for the sick companies, it's possible that nothing can save them, not even sacrifices by the staff.

In the 2001 dot.com crash, my husband, who is a Java developer, found himself working for a firm that was not paying salary. They kept promising that the back salaries would be paid "next month" when one of their clients paid their bills. Finally, after I threw a strop, he agreed to resign and temp instead, because at least temping would bring in some money. It was the right thing to do - it turned out that the firm was slowly going under, they were running out of money, and were relying purely on employee goodwill (obtained by deceiving them) to keep going. Resigning meant that my husband's backpay had to be paid to him at the time he left. Other members of the firm were not so lucky - when the firm liquidated a few months later, they lost the pay owed to them as there was simply nothing left to pay them with.

1. If your firm is asking you to take a paycut, the first thing to do is to get your CV out and update it. Good employees get jobs regardless. Start looking for other jobs, preferably in an industry not as affected by the recession. This might mean upgrading your skills and ensuring you are up-to-date with your professional exams.

The ideal situation here is to be able to get another job, and then volunteer for redundancy at your current position. That way, you walk away with a redundancy payment, and have a job to go straight to. In other words, you've ensured that despite the recession, you are quids in.

But even if you don't qualify for redundancy payments, getting a better, safer job at a salary equivalent to before the paycut or better, gets you out of a bad situation.

2. If given the choice between unpaid leave, and working unpaid, always choose the unpaid leave. Time has a value in itself. If you take the unpaid leave option, you have the time to go to class and upgrade your skills, to take on casual work or temping jobs that will bring in money, and to perhaps diversify by earning money online. Working for nothing is simply a waste of your time, don't do it.

3. Cut back on all expenditure and build up emergency savings. If you can't find another job and are stuck with your existing company on a paycut, be aware that the company might go bust and leave you with no income at all. Prepare for this by building up your emergency savings so that you can survive regardless. If you can, pay down as many debts as you can while still employed.

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