Should You Ever Take a Pay Cut?
Most of the time the answer is no, but there are exceptions.
Former Yankees manager Joe Torre made headlines recently when he turned down an offer to manage the team for another year for $5 million, or a 22 percent reduction from his previous salary, albeit with performance incentives. His thinking was that the offer showed that the Yankees had lost faith in him-even though he would still have been the highest-paid manager in the game-and so it was time to move on.
"The fact that somebody is reducing your salary is just telling me they're not satisfied with what you're doing," Torre said at a press conference explaining his decision.
But can it ever be a good decision to accept a pay cut? Sometimes the answer is yes, say career experts, but only in certain very specific situations. A company in an industry-wide or economic downturn may ask its employees to take lower salaries to keep the organization afloat or to avoid massive layoffs. In that case, the alternative is often having no job at all. Executives frequently accept lower base pay in exchange for stock options or other financial incentives that can result in a big payoff down the line, and career changers moving from lucrative industries into nonprofits or academia usually have to take a hefty salary cut.
But in many cases, a pay cut is a not-so-subtle way of saying you're no longer wanted, which is how Torre interpreted the Yankees' offer.
"Often this is just a message for you to leave," says Bill Belknap, an executive coach with the Five O'Clock Club, a national outplacement and career-counseling organization. "A lot of hard-nosed companies wouldn't even give you the option. They would just fire you."
Belknap says he generally advises his clients against taking a pay cut because it usually means a step back in an executive's career, especially if management believes that the employee has been a poor performer. Belknap tells clients who are offered a pay cut that they should usually resign unless the organization promises to restore their compensation to its earlier level if performance improves.
Belknap adds that if word gets out about an executive's pay cut, it could be a lot more difficult to motivate employees, since they might lose respect for a manager they perceive to be weak or a loser.
Dory Hollander, a workplace psychologist based in Arlington, Virginia, agrees, saying that accepting a pay cut often carries such a stigma that an employee can become a "mini-pariah." She believes, however, that the stigma is often unfair, since advancing in one's career requires taking calculated risks that occasionally may mean taking a pay cut.
Derek Chew, a program manager for Yahoo in Santa Monica, California, is a good example.
In 2003, Chew took a risk by asking his boss at a Michigan-based Web-marketing startup to move him from his position as project manager to one as a sales associate. The move meant he'd have to take a 50 percent pay cut, albeit with an opportunity to earn commissions, but Chew felt it was worth it to learn more about the company he was working for.
"As a project manager, you don't get to go and see what's behind the curtain," he says about his six-month turn in sales. "You can't always put a monetary value on getting new skills or doing something that gives you a springboard to get to the next level."
Chew discovered that while sales appealed to his competitiveness, he had no real passion for "chasing clients," as he calls it. But the experience in sales and marketing helped give him the confidence to subsequently start his own Web-marketing and -consulting business, which he ran for two years before joining Yahoo earlier this year.
George Dow, a Minneapolis-based executive coach, says there are other situations that may warrant accepting a pay cut. Older professionals, for example, may decide to downshift into jobs that are still challenging but not as time intensive.
This was, in part, the situation for a 56-year-old human resources executive who left a high-six-figure salary and a partnership in a Midwestern financial-services firm for a lower salary and a lesser position at a Silicon Valley company closer to her family. The executive, who requested anonymity because she doesn't have her current employer's permission to speak to the press, resigned from her previous organization after a leadership change left her feeling shut out of important organizational decisions. But, she acknowledges, the decision wasn't easy because she had equity in her previous company and a large degree of responsibility.
"To genuinely walk away from a lucrative situation because it's not personally fulfilling is difficult," she says. "[But] we didn't have a lot of debt, and we no longer required the same level of income." In the end, she says, she has mixed feelings about her decision, saying she underestimated the adjustment involved in starting over in a new city and a new company, but that she enjoys the new job's challenges and being able to spend more time with her family.
Public relations executive J. Scott Punk has been relatively content to trade salary for experience and quality of life. The 44-year-old executive has seen his salary drop more than 20 percent since 2002, when he was a director in Washington D.C. for one of the world's largest public relations companies.
Punk left the P.R. firm in 2003 for a high-level position at MRB Communications, a Washington-based advertising and public relations company with just 26 employees, since he thought that MRB's corporate culture would be a better fit for him. But the boutique firm couldn't pay him what he had previously earned, so he negotiated a four-day week and has also earned substantial annual bonuses of about 10 to 15 percent of his yearly salary.
Punk was happy at MRB, but when his partner was given a temporary assignment in London in May 2007, Punk jumped at the chance to live abroad, thinking he would get by on freelance consulting work. But company his partner worked for, ESI International, wound up offering Punk a job as senior manager of global public relations. He again negotiated for a four-day workweek and a full benefits package while telecommuting from his London home. The tradeoff? Another, smaller pay cut.Visit Portfolio.com for the latest business news and opinion, executive profiles and careers. Portfolio.com© 2007 Condé Nast Inc. All rights reserved.