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Cutting salaries? Five ways to make the process less painful

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Entire sectors in the South African economy will be overturned by the Covid-19 crisis, says Rick Ed, small business advisor and founder of DoBetterBusiness.  When it comes down to survival, “it’s easiest to cut salaries or let employees go”.

But, says Ed: “That’s not a painless solution. Consider labour legislation, staff morale and post-lockdown recovery capacity issues, not to mention the emotional burden of letting your people suffer.”

So, when do you make that call? Is retaining all your staff on full salary more important than incurring debt in order to do so?

Hennie Stander, who has built his career on providing financial management to SMMEs, recommends taking the long-term view on affordability.

“I don’t think taking out loans to finance operational costs including salaries and overheads is the wisest thing to do if the business is not operational, or if the business is loss-making as a result of the crisis,” says Stander. “All efforts to reduce costs and preserve cash flow should be made. Debt will only put a future strain on the cash flow and could result in tremendous financial stress on the owners of the business if they’re not able to recover from the process.”

If salary cutting is necessary, “act quickly, as time is money,” he says. If you’ve arrived at that conclusion, here are five ways to make the process more bearable.

Involve your employees in the discussion

Experts recommend being transparent with your employees. Help them understand the company’s financial position, and involve them in the problem-solving process.

“In my own business some years back, we realised that we wouldn’t make it through the year-end break,” says Ed.  “I invited my staff to propose solutions.  They suggested that we cut back salaries and work double shifts until the business recovered.  With their support, the company did spectacularly well, and we paid out generous bonuses six months later.”

Cut your own costs first

“Many SMME owners are the biggest expense in their business,” says Stander. “They draw salaries that the business really can’t afford, they drive expensive cars that are financed by the business, and on top of this, some use their businesses to fund their lifestyles by using company credit cards, and so forth.” Does this statement hit home for you? 

Lead the way by cutting your own salary significantly, and ensure that your employees know you’ve done so. “Lock the credit card away, negotiate payment holidays and vehicle and property bond instalments, and pause debt repayments, including credit cards.”

Show your employees that their wellbeing is your priority

“If the relationship between employer and staff is strong, I find that for those businesses, the employees tend to be more sympathetic towards the employer,” says Lusanda Mncwabe, an SMME advisor and founder of The Accounting Village.

On LinkedIn, she talks about a client “who has 85 employees on his payroll, most of them low-skilled. Just like all other businesses, he’s been struggling to make ends meet during this time, as all his clothing stores [were] closed. The one thing that resonated with me was the love he has for his staff. He puts them first in all his decision making, and he says knowing they may lose their jobs if the lockdown continues keeps him up at night”.

Mncwabe tells the M&G that because this business owner’s employees could see that he was doing all he could to ensure they got paid, “the employees were very sympathetic”.

On the other hand, “if the relationship was not good before, you will find that the employees will then want to revolt, and they want to take action; that kind of thing. So, it’s up to the business owners to manage that relationship”.

Consider a tiered approach

While the impact of the pandemic will be felt by most households almost immediately, they will likely be deeper and longer-lasting among the poor, the World Bank observes.

Try to mitigate for that by how you adjust salaries in your company. Stander tells of a law firm that recently implemented a tiered approach to pay cuts: the higher earning staff’s salaries was reduced by a higher margin and lower-earning staff had their salaries reduced by a lower margin. All staff that earned R10 000 per month or less did not have their salaries reduced at all. The business owners, partners and managers has their pay checks docked by 40%.

Hold the government accountable

If your company is up to date with its Unemployment Insurance Fund (UIF) payments, your employees qualify for assistance through the Temporary Employer/Employee Relief Scheme (TERS).

Ncwabe says that many of her clients are paying their employees 50% of their normal salary amount, and then waiting for TERS to “top them up”. A situation where people are stuck with half of their salaries is better than laying off, she says.

TERS also allows for employers to pay salaries upfront and then claim the reimbursement through TERS. But practitioners say that there’s a good chance your submission might be rejected initially, or that you will need to follow up more than once. “You have to keep following up and following up,” says Mncwabe. After the scheme’s initial hiccups, many small businesses are now being paid out successfully.

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