What Happens to Total Compensation When Things Go Bad?
You were promised a certain level of compensation. After all, total compensation equals salary plus bonus plus commission plus stock, right? Each of those components has some basic rules and expectations attached, and there is an agreement that if you do your job properly, you will be compensated for it. But what happens to total compensation when things go badly wrong?
Each component of your total compensation can be affected differently by different events at your company. Obviously, if there’s a big layoff and you get let go, then there goes your compensation. Although there are still things, you can do.
But an economic downturn can affect any company and lead to financial adjustments that could affect our compensation.
Promotions and raises go first
When a company struggles financially, it typically focuses on boosting revenue. But if that isn’t going to work, it eventually turns to cost-cutting. After cutting back on projects and other expenditures, the first things to go are typically promotions and raises. This is a relatively easy way to lower predicted costs.
In some companies, raises and promotions are on a regular schedule that employees grow to expect. But once a company is in cost-cutting mode, it will disappear. This is a relatively painless cut for employees but still affects your expected compensation. Other companies only give raises and promotions after their performance review period; again, these can be expected to go no matter how well you do on your review.
Bonuses get cut next
Bonuses are a more expected part of compensation than raises or promotions. So companies know that by cutting bonuses, they are really sending a signal to employees that there is financial trouble, so they turn to this next after stopping raises and promotions.
Cutting bonuses can happen at varying levels and stages. If the company is in obvious trouble, all bonuses will get cut immediately. But if they believe they can weather the storm, then bonuses will get reduced in some manner – by a percentage usually. In some companies, bonuses are explicitly tied to the company’s financial results, so the cuts will be obvious ahead of time. In others, they are linked to performance, and employees will feel hard done by if bonuses are cut.
Whichever way bonus cuts happen, they are more severe for both the company and employees.
Commissions are usually safe from cuts.
Commissions are rarely affected by this kind of economic downturn. They are directly affected by increased revenue. Since the primary business goal is to increase revenue, cutting commissions would severely and adversely affect their most positive method of improving business. So commissions are safe, even when jobs themselves aren’t.
How stock is affected in a business downturn
Stock grants aren’t usually cut even when a business is doing poorly. There is little point since in a public company, their price is linked to business success, and in a private company, the same is true, but also the cost is negligible to the company. Instead, the value of the stock goes down, meaning the value of stock compensation goes down. In a startup, this signals that the stock’s probability of becoming valuable has dramatically declined.
In a public company, stock will vary greatly over time and be affected by public opinion. If the company is struggling financially but is seen to be taking decisive action to cut costs, such as engaging in layoffs, then the stock will remain strong.
Furloughs and voluntary cuts
In some rare cases, when companies genuinely want to avoid layoffs, the company will furlough employees. This means suspending their work without laying them off. If the company turns things around, they will restart their jobs as they were. Furloughs sometimes involve reduced hours or a much-lowered pay so that employees stay on rather than look for other employment.
In other cases, employees will be asked to voluntarily reduce salary and hours to avoid layoffs. Again, this is a sign that the company doesn’t want to lose any employees and is looking for avenues to keep them on the books.
The final cut – layoffs
Obviously, if things are terrible, the company will start letting employees go. Obviously, this rather drastically changes compensation! Even with a layoff, you can do something to protect yourself and your compensation.
To find out more about how specific companies tend to act in all of these circumstance and how you can influence your total compensation, join Blind and ask your co-workers!