When You Should (And Shouldn’t) Accept a Pay Cut

In the wake of the COVID-19 pandemic, some companies are reducing salaries to avoid layoffs. Still others are proposing to lower salaries for tech pros who decide to work from home permanently and relocate to an area where the cost of living is lower.

If you are facing a pay cut, what should you do? You can choose to accept or decline the request, but your decision may have consequences.

Here’s a look at the times when you should say “no” to a pay cut and the rare times when you should say “yes.”

Say No to a Pay Cut When…

Your Boss Agrees to Let You Continue Working Remotely

There is no justifiable reason to reduce your salary if your company agrees to permanent remote work and you subsequently decide to move to an area with a lower cost of living, explained Victoria Pynchon, a lawyer, negotiation expert and founder of She Negotiates.

“As long as you are doing the exact same job and making the same contribution to the company, your personal situation has no bearing on the value you bring,” Pynchon said adamantly. 

After all, should a company pay a single apartment dweller less than someone with a family and a big mortgage, so long as they are doing the same job? Most people would agree they should not.

While Pynchon acknowledges that many companies factor in market conditions and geography when setting salaries, considering someone’s personal situation creates wage inequality, which tech firms have been trying to overcome. Bringing that point up may help tip the scales in your favor.

Revenues are Down, Profits are Flat

Don’t agree to a pay cut just because sales are declining… unless the business is no longer profitable or running out of cash.

Some businesses have found ways to temporarily reduce operating costs by slashing discretionary bonuses, dividends, travel expenses and advertising expenditures. As a result, the company’s profits are holding steady even though sales are falling.

If the company can meet its expenses and its profit outlook is positive, then there’s absolutely no reason to accept a pay cut. Plus, the courts have ruled that reductions in salaries for exempt employees need to be tied to long-term business needs. “Taking advantage of a downturn in the economy to lower salaries when the business is not suffering, is incredibly bad form,” Pynchon lamented. 

The Pay Cuts are Disproportionate and Unfair

The moral and business arguments for sharing the pain during a downturn are clear, so before you agree to a reduction in salary, make sure the proposed pay cuts are proportionate and fair. 

For instance, mandating an across-the-board cut of 10 percent obviously has a much bigger impact on tech workers than tech CEOs (who averaged $6.6 million last year, according to data from executive compensation company Equilar). Executives should be leading the way.

Say ‘Yes’ to a Pay Cut When…

You Need to Buy Time

If you are a junior-level technologist employed by a small business or nonprofit that has been impacted by the pandemic and is struggling to make payroll, then it might make sense to take a pay cut until you get more experience, advised Clifford Stephan, a compensation consultant, expert and founder of OneCompensation. However, his advice comes with a caveat:

“If you’re at a critical juncture in your career, make sure you can keep your title or jump to a higher title and have the opportunity to add in-demand skills to your resume in exchange for a salary cut.”

Sometimes its easier to find a new job or negotiate the most favorable compensation package when you’re still employed and earning a high salary, Pynchon noted. (Keep in mind: Not every state or locality has outlawed pay history questions; you may lose negotiating power with a new employer if you take a cut and then decide to cover your bases by hitting the job market.)

Instead of taking a cut, see if you can stay with the company for 90 days while you look for a new job. Negotiating your exit terms creates goodwill and a sense of relief for the company, too, because they know exactly when you will be leaving.

It Works in Your Favor

Run the numbers. If you can move to a city that is more affordable or reduce your hours and take-on a high-paying, skill-building side-hustle (or even start your own company), you may actually come out ahead despite a pay cut.

After all, changing your agreed-upon salary puts everything back on the table—and while pay is under pressure, employee perks are getting a fresh look. If you can negotiate stock options, a performance bonus or more time off to look for a better job, you may be able to mitigate much of the pay cut.

You’re Out of Options

If you can’t survive on unemployment benefits alone and you are holding onto your employer’s leg for dear life, then you may have no choice but to accept less money, Stephan observed. The reality is that you need to take steps to make yourself more marketable before you’re facing a salary cut, but if that doesn’t happen, you may need to stay the course.