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3 Signs You Need to Take a Pay Cut

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Whether it was federal budget cuts, shareholder activism or the 99 percent versus 1 percent debate, CEO compensation has been in the news a lot these days. Ron Johnson, CEO of J.C. Penney, was given a 97 percent pay cut due to poor financial performance in 2012, according to figures released this week. And on Wednesday, President Obama announced that he'll be giving back 5 percent of his salary in response to federal workers being furloughed due to budget cuts.

Taking a cut in your pay can send the message to employees that you are committed to your business and willing to make whatever sacrifices are necessary. If you're a one-man-show, a pay cut can free up cash to invest in your business's long-term future.

But how do you know when it's appropriate to scale back your own salary? Here are three signs it might be time for you to take a pay cut:

1. Sales and profits took a hit.
If your sales and profits have both dropped 20 percent or more in a year, you should consider taking a similar percentage pay cut. This shows outside investors you feel their pain. If you're the sole owner, the pay cut helps to offset the loss in income needed to fund operations.

Since turning around sales usually takes longer than cutting costs to improve profits, you need to decide if the money is better off in your pocket or more useful supporting sales growth. Once sales and profits have both recovered to previous levels, you'll want to increase your pay.

Related: How to Set Your Salary

2. You're adding new products or changing your company's focus.
If you are making changes in your business to better serve your customers evolving needs, it can be worth taking a short-term pay cut during the transition period. Let's say 10 years ago you were an apps software developer for Blackberry mobile devices, when suddenly Apple's iPhone came out. It can make sense to take a short-term loss to fund the development of iPhone apps. The problem is you now have the R&D costs for two mobile platforms, but only revenue from one.

Taking a short-term pay cut now, can help your business fund new R&D investments and enable future sales growth. When the new growth kicks in and the finances improve dramatically, you can give yourself a big pay raise that more than offsets the pay cut. This creates a win-win-win situation for you, your investors and new customers you couldn't have served any other way.

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3. You have to cut employee pay, forgo bonuses or layoff people.
When you grow too fast or the economy takes an unanticipated turn for the worst, sometimes layoffs are impossible to avoid. During these belt-tightening times, the morale of remaining employees often gets damaged by forgone bonuses and skipping annual pay increases. In short, it's depressing to be working for a company that's under financial pressure.

If you're trying to convince your staff to hang tight during these -- hopefully temporary -- difficult times, it can help if you're sharing their pain. By taking a modest, largely symbolic, pay cut, you send the message that we're all in this together. It can help people buckle down and work as a team --which is exactly what's needed in a crisis.

Related: 5 Ways to Train Yourself to Be a Great Leader

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