Cutting Pay Responsibly: 4 Considerations For Businesses Planning To Reduce Wages, According To The National Wages Council (NWC)

How employers can cut pay responsibly

The ongoing COVID-19 pandemic, and the government’s safe management measures to curb its spread, has placed pressure on many businesses. Understandably, many businesses may be considering cutting wages in an attempt to reduce cost to survive this crisis. 

Reducing employees’ wages is a critical decision for employers. A pay cut will affect your employees’ morale as well as their lifestyle and put their finances under pressure – which is never the best way to keep workers producing good work. 

In turn, this could force your business even further backwards. As an employer, you would like also see recruitment expenses rise with higher employee turnover rates. Your best employees would also likely be the first ones to leave.

To give guidance to employers on implementing appropriate wage cuts, the National Wages Council (NWC) sets out some key principles. Here are 4 key considerations for businesses planning to reduce employee wages.

#1 Management To Take Earlier And Deeper Wage Cuts

If cutting employee wages is critical to staying afloat, leading by example with your management team taking earlier and deeper pay cuts may be the ideal way to start. 

While it does not make the situation better for them, doing so sends a strong pledge of commitment to your staff – that you would do anything it takes to ride out this storm and to save their jobs.

Read Also: 5 Things You Should Know About MOM’s Labour Market Report 1Q2021

#2 Utilise the Flexible Wage System

If you have not done so, the NWC recommends adopting a Flexible Wage System (FWS) immediately. This is a wage scheme that has a set monthly and monthly/yearly variable components allowing wages to be more rapidly adjusted in periods of economic uncertainty. Any cuts to employee salary due to COVID-19 situation should be treated as adjustments to a new variable component for employees.

Under the FWS, the NWC recommends that rank-and-file employees have up to 30% of their total wage package based on a variable component – 10% for the Monthly Variable Component (MVC) and 20% for the Annual Variable Component (AVC), inclusive of the Annual Wage Supplement). The recommended split for middle management is 60%:40% and for senior management it is 50%:50%.

As a final resort to avoid retrenchments, employers can also consider temporary reduction of basic wages after the variable components have already been adjusted. Such a temporary reduction is an exceptional cost-saving measure necessitated by the COVID-19 pandemic.

Read Also: Annual Wage Supplement (AWS), Annual Variable Component (AVC), Monthly Variable Component (MVC): Here’s How The Flexible Wage System Works

Implementing a fair and transparent variable wage system also alleviates one of the greatest concerns on employee wage cuts – that it will be permanent. With a fair and transparent variable wage system, reductions should be restored in tandem with business recovery. To show your sincerity, a variable component that allows employee wages to surpass previous levels once the business recovers can also be a damage-limiting measure on employee morale.

#3 Take Into Account Various Factors In Deciding What Is A Reasonable Level Of Wage Cut

When it comes to cutting wages, employers should try to avoid a broad-brush approach. Businesses should take into account their company’s performance and outlook, and make use of relevant government grants and incentives to offset business costs and workers’ salaries. 

As safe management measures have been tightened and eased several times already, businesses should also take into consideration prior wage cuts and other cost-saving measures, such as reductions in allowances, shorter work weeks and no-pay leave.

Another way to avoid a broad stroke in cost cutting measures is to implement it uniformly. For example, the impact of a 50% wage cut will be felt more deeply by lower wage employees compared to employees in the higher salary bands. 

Furthermore, where employees continue to contribute their full working hours, or even take on longer working hours, despite the business downturn, employers should take this into account in deciding the appropriate wage cut.

Read Also: Here’s What You Need To Know About The Jobs Support Scheme (JSS)

#4 Give Special Consideration To Low-wage Workers

More empathy should be given to the lower-wage groups. Employers should bear in mind that all employees would have basic expenses to upkeep for the families. To protect the lower-wage workers, the NWC recommends that employers should freeze wages for those earning below S$1,400 a month instead of cutting their pay. 

In addition, employers ought to avoid a situation where employees fall below a basic monthly wage of $1,400 after wage adjustments.

Negotiate Salary Adjustments With Unions & Notify Ministry Of Manpower (MOM) Any Cost-saving Measures Affect Employees’ Salaries

While employees’ wages cannot simply be cut without their consent, it is hard for employees to block them. This is one reason why unions exist – to protect employees from being unfairly subject to wage cuts. To this end, the NWC recommends that business negotiate and agree wage adjustments and the implementation of flexible wage systems with relevant unions. 

Employers who implement cost-saving measures must also notify MOM within 1 week (7 calendar days) if you:

  • Are registered in Singapore.
  • Have at least 10 employees.
    AND
  • Implement cost-saving measures that result in:
    • More than 25% reduction in gross monthly salary for local employees.
      OR
    • More than 25% reduction in basic monthly salary for foreign employees.

Employers should also look at retrenchments, in a responsible manner, as a last resort.

Read Also: It Hasn’t Been Business As Usual For “Non-Affected” Sectors In Singapore

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