When Firms Are Hurting, the Pain Should be Shared

What are the relative ethics of company-wide furloughs (mandatory time off without pay), salary reductions and permanent layoffs?

I am assuming that the company absolutely needs to reduce labor costs in a time of real crisis -- unprofitability that is likely to last a while, rather than just a brief dip in a normal profit margin. I am also assuming that the belt-tightening began at the top of the company, with its owners. Dividends have been halted, along with executive bonuses. Everyone's pay has been frozen, nonessential spending cut, and perhaps fringe benefits trimmed.

If all that has been done and there is still a compelling need to economize more, many folks think the most ethical course is to impose a little pain on everyone and keep all employees in place to await a recovery. (Hiring and training new staff is sometimes more expensive than carrying the current staff through a slump.) This can be best accomplished with company-wide unpaid furloughs, which at least give employees more free time in exchange for lower earnings. Some companies schedule furloughs to give their staffs a usable chunk of time for travel or moonlighting -- for example, closing the firm for a week in the slow season, or giving some Fridays and Mondays off for long weekends.

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An alternative is salary reduction with no extra time off -- say, a 5% cut in everyone's pay or reductions on a sliding scale, with deeper cuts for higher-paid employees and smaller cuts for others. There should be an understanding that pay will be restored to previous levels when profitability returns.

Layoffs concentrate the pain on a smaller number of people. They are ethically defensible if an unprofitable company believes it is overstaffed in a given function, and will continue to be overstaffed after a cyclical slump is over, due to fundamental changes in its market. Businesses must be free to reshape their workforces to respond to changing conditions, and they should clearly communicate the rationale for each move they make.

Layoffs should be done with compassion for the terminated workers, and companies should offer generous severance and assistance in finding new work in a difficult job market.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.