Need to downsize? Your future employees may like the idea of cutting pay more

Abstract

PurposeStudies comparing the consequences of payroll cost reduction methods (i.e. cutting pay and downsizing) have been limited, with no studies comparing these methods' impact on job-seeker attraction. The current research tries to close this gap by comparing the effects of cutting pay and downsizing on job-seeker attraction outcomes.Design/methodology/approachTwo studies are conducted. The first study compares the effects of the two payroll cost reduction methods (i.e. cutting pay vs downsizing) on job-seeker attraction through a within-subject design experiment of people in the United States. The second study analyzes secondary data in South Korea to compare the two methods' effects on the number of job applicants applying for job openings.FindingsThe results demonstrate that organizations with a history of pay cuts yield more favorable job-seeker attraction outcomes than organizations with a history of downsizing.Practical implicationsAlthough firms that choose to downsize may better maintain the morale of surviving employees, the decision of downsizing can have long-term costs, such as having a worse capability to attract job-applicants than firms that choose to cut pay and share the pain as a group.Originality/valueThe research provides an insight into which payroll cost reduction method yields better outcomes in terms of job-seeker attraction. The research responds to the call in the payroll cost reduction method literature of identifying a feasible alternative to downsizing in terms of various outcomes other than the morale of current (or remaining) employees.

Can cutting pay be an alternative to cutting people when maintaining work attitudes is a concern? It can be if employees trust you

“…An organization's total payroll cost (i.e., cost of salaries and wages) at a given point in time, thus, is the function of the number of workers that the organization utilizes and their pay rates. To reduce payroll costs, therefore, an organization can apply one or both of the following two methods (Yoon, 2022a(Yoon, , 2022b. First, the reduction can be achieved by decreasing the average pay rate of employees.…”

“…Therefore, the relationships that are observed in the studies may be stronger than they would otherwise be observed. However, as the main objective in these studies is to "compare" the effects of pay cut and downsizing on the outcomes of interests rather than to "estimate" these effects, this may be less of a concern (Yoon, 2022a(Yoon, , 2022b.…”

Need to cut or freeze pay of your employees? Providing work–life balancing practices can help if maintaining employee morale is a concern

“…Past studies on pay cuts/freezes Cutting (Freezing) pay is referred to as an act of an organization reducing (freezing) its employees' pay rates (Yoon, 2022) for often the same or similar amount and type of work that employees do. Employers may utilize the option of cutting (or freezing) pay, alongside the option of downsizing the number of employees, in needs of reducing payroll costs (Yoon, 2022).…”