The decision to whether accept a salary cut when offered a new job is a complex and subjective one, influenced by various factors and considerations. Many senior HR leaders feel that the decision requires a careful evaluation of several factors that individuals should take into account while considering a salary cut, along with the potential resistance factors and challenges they may encounter in such situations.
The decision to take a salary cut after being laid off is highly personal and depends on people’s situations and financial circumstances. Also, there are many elements to consider beyond just salary.
Growth prospects: The first and foremost factor is the organisation itself and the growth prospects it offers to employees. “Sometimes, taking a temporary step back in terms of salary can lead to greater long-term growth and advancement. Therefore, if the organisation provides significant potential for personal and professional development, it may not be wise to reject the lower pay outright without considering the larger picture,” shares Ranjith Menon, SVP and global HR executive, Hinduja Global Solutions. If the job is with a larger organisation that offers better growth prospects, it’s worth factoring that into one’s decision-making process.
Unemployment period: The period and length of unemployment is also one of the vital factors to consider. “In my experience, the longer individuals remains out of active employment, the less likely they are to receive job offers that match or exceed their previous salary. It is rare to come across cases where individuals are offered significantly higher salaries or compensation equivalent to what they were earning before,” points out Mukul Harish Chopra, CHRO, ConveGenius.
“If one doesn’t see positive trends in terms of interviews and job offers, for a time frame of say six months, it may be advisable to accept any job offer that comes one’s way. Even if it means a salary cut,” advises Menon. “This is because, being without a job for an extended period, even if one has sufficient savings, is not an ideal situation,” explains Menon.
Limited options: “In some cases, a person may be faced with limited options, such as not having any job prospects currently available to them. In such situations, even if they have to accept a salary cut, it may be the only viable choice considering the absence of alternatives,” opines Lalit Kar, senior VP and head-HR, Reliance Retail.
Financial situation: “If people have financial means to sustain themselves or can afford to wait for a better job opportunity, it may be worth considering whether to accept the current offer or hold out for a position with better pay,” believes Menon. For instance, if one is currently working in a small startup with 50 employees and has an opportunity to join a renowned company such as Amazon, Facebook, or Google, the potential for a longer and more successful career, as well as greater progression, is likely higher in the larger organisation. If one’s financial situation allows managing with a lower salary, even if it is around 20 per cent less, it could be a viable option.
“Sometimes, taking a temporary step back in terms of salary can lead to greater long-term growth and advancement. Therefore, if the organisation provides significant potential for personal and professional development, it may not be wise to reject the lower pay outright without considering the larger picture.”
Ranjith Menon, SVP and global HR executive, Hinduja Global Solutions
For ideal opportunity: “It’s significant to consider how long one can afford to wait for the ideal opportunity or if it’s more practical to accept a job offer, even if it means a lower salary,” points out Menon. Generally, this happens in the mid-management, where some senior-level employees may choose to take a break of one or two years — not necessarily due to financial reasons but because they are waiting for the right opportunity to arise.
Better compensation basis skills: People may choose to accept the salary cut but demonstrate exceptional performance and contribute significantly to the organisation. “By showcasing their value and proving themselves as an asset, they may be able to negotiate higher increments and compensations over the course of one or two years. This way, they can gradually cover up the initial loss in salary,” opines Kar. This will also help them continue with their lifestyle and even fulfil their personal responsibilities.
Menon shares, “In many mid- to junior-level positions, it’s common to experience double-digit salary increases. This means that within a year or two, the employees concerned may be able to make up the initial pay difference. In that time frame, they would have established themselves in a larger organisation, increasing their potential for growth and future pay raises.”
“While it may require stretching the budget a little, if organisations can afford it, it can be a win-win situation. Their integration into the organisation and learning curve are likely to be smoother, leading to better outcomes. Similarly, the organisations can acquire top talent, potentially surpassing their initial budget, but the long-term benefits outweigh the additional expenditure.”
Mukul Harish Chopra, CHRO, ConveGenius
Alternatively, employees also have the option of joining the new organisation, accepting the cut, and simultaneously actively searching for and pursuing other job opportunities. This allows them to explore the possibility of securing a higher-paying job even while still remaining employed.
It’s also about whether the current job offer fulfils the lifestyle and responsibility needs that one might have. “ I would take into account if the offer that I have received is sufficient to meet my needs up to a certain point,” states Menon.
Generally, people tend not to drastically increase their expenses unless they are in a poor financial situation. Regardless of whether someone earns a lakh per month or five lakhs per month, their lifestyle may not change significantly. For instance, if one’s expenses are currently 70,000 per month, one may only increase the same to one lakh per month if one receives a slight salary increase. In such cases, the key consideration is how much money one is able to save, and if accepting a lower salary impacts one’s savings potential. If the previous salary was Rs 60 lakhs per year and the new offer is Rs 40 lakhs per year, it means one’s monthly savings will decrease slightly. However, this reduction in savings can still be manageable if the opportunity comes from a better organisation.
On the flip side, if the current salary is, let’s say, Rs 5 lakhs and one receives an offer of Rs 4 lakhs, leaving the current job may not be an ideal situation either. Though the difference is not much, if one is already earning Rs 5 lakhs and really needs that income, the reduction could pose financial challenges. That’s another aspect to take into consideration.
Overall, it’s about how one assesses one’s own comfort level in managing finances with a lower salary, and how weighs the potential long-term benefits against the short-term impact on their income.
Organisations face the ongoing challenge of attracting and retaining top talent and it becomes particularly pronounced when considering individuals who have been laid off from prominent companies or who are seeking better career prospects. When presented with the opportunity to hire such individuals, companies may find themselves contemplating whether to offer a higher compensation package to entice these desirable candidates. This raises the question — ‘Should companies provide a salary hike to attract top talent?’
“Certainly, from a company perspective, attracting top talent is crucial, especially when individuals with valuable skills and experience become available due to layoffs at big companies. In order to secure such talent, companies may consider offering a salary hike as an incentive,” admits Menon.
“If the compulsion is not significant, it is advisable for the company to hire within the established salary bands. Bringing in a laid-off employee with a higher compensation can create a sense of disparity among existing employees, and word may spread about the preferential treatment given to the newly hired individual. This can lead to internal dissonance and potential issues within the company,”
Lalit Kar, senior VP and head-HR, Reliance Retail
By offering an increased salary, companies can demonstrate their commitment to valuing and compensating top talent appropriately. This approach can help them remain competitive in the talent market and position themselves as an attractive option for skilled professionals.
The decision to offer a higher salary to attract laid-off top talent, however, will depend on many key factors.
Affordability: “First, it relies on the company’s financial capability or affordability to compensate such talent,” points out Menon. The company’s ability to offer a higher salary will be influenced by its resources and budget. Additionally, it’s important for companies to consider their financial capacity when determining whether to provide a salary hike to attract these individuals, regardless of their employment status or motivation for seeking new employment.
For instance, if the budget is set at 20 lakhs and they are exceeding it by Rs 5 lakhs to reach 25 lakhs, it represents a 20 per cent increase. If the companies can manage this increase by making adjustments elsewhere in the budget, it may be worthwhile.
“While it may require stretching the budget a little, if organisations can afford it, it can be a win-win situation. Their integration into the organisation and learning curve are likely to be smoother, leading to better outcomes. Similarly, the organisations can acquire top talent, potentially surpassing their initial budget, but the long-term benefits outweigh the additional expenditure,” asserts Chopra.
Availability of talent: It’s also about the availability of the talent. The primary distinction between a laid-off employee and an employee currently working elsewhere is typically the notice period. A laid-off individual may be immediately available for employment, while someone who is currently employed may require a few months to transition. This notice period is often the main and only difference between the two.
Capability and suitability: “Another factor is whether the hiring organisation has to understand whether the person has the right capabilities,” points out Kar.
Also, when considering a laid-off employee, it is crucial for the hiring company to delve deeper into the reasons behind the employee’s departure, particularly if it was due to performance issues. “It is important to conduct thorough checks to ascertain whether the performance concerns were valid or if there were underlying difficulties with their previous boss or other external factors. Additionally, it is essential to evaluate whether the company was experiencing a surplus or if the employee was assigned to a project that did not perform well. These considerations are vital in making an informed decision,” adds Kar.
Nature of job: Another factor is also considering the nature of the job itself. “It’s essential for companies to consider their internal salary benchmarks and assess whether they have the capability to provide a more competitive compensation package. When it comes to top talent, identified through rigorous interview processes and established track records, many organisations are willing to offer higher salaries to attract and retain them,” opines Menon.
“Each organisation has different levers to manage their financial resources, and it’s a matter of assessing the criticality of the skills needed and making decisions accordingly. In some cases, they may be willing to go over the budget to secure the desired talent, while in other situations, they may look for ways to save costs,” asserts Menon.
While many companies would consider stretching their bandwidth for the high-potential talent, the decision of whether to offer a higher compensation to a laid-off employee depends on the level of compulsion faced by the hiring company. “If the compulsion is not significant, it is advisable for the company to hire within the established salary bands. Bringing in a laid-off employee with a higher compensation can create a sense of disparity among existing employees, and word may spread about the preferential treatment given to the newly hired individual. This can lead to internal dissonance and potential issues within the company. It is important to adhere to established norms and payment structures applicable to all employees, including new hires. Deviating from these norms can create imbalances within the organisation and further amplify concerns regarding the individual’s layoff,” points out Kar.
He further explains, “it is crucial for a company not to exploit a laid-off individual based on their circumstances. The compensation should align with the role they are being hired for and the contributions they are expected to make.Transparency is key in these situations. Clearly communicating the salary band and the company’s limitations regarding increments or adjustments is essential. If the company can only offer a certain salary within the defined band or if they require the individual to take a pay cut, it should be conveyed openly during the discussions. This transparency ensures that the person understands the company’s compensation norms and does not develop any negative perceptions about being taken advantage of due to their difficult circumstances.”
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I think in the era of pay equity practices and organizations promoting an inclusive culture, why would they want to talk about “salary cut”. Doesn’t it lead to organizations taking undue advantage of someone’s situation that is beyond their control?