Why do companies typically choose to implement layoffs affecting numerous employees rather than considering salary reductions for top executives like the CEO?
In: Economics
So, let’s say you’re the local state administration of In-And-Out Burger, a burger chain that isn’t franchised, but controlled through the central office.
A few years ago, your business was expanding. You opened a bunch of new locations, and brought on new staff. But, since then, there’s been a pandemic, and inflation. People aren’t coming in as often.
So, the first thing you do is shrink shifts. The old lunch rush needed 4 people, but with demand down, 3 is enough. Cutting manager pay to keep the 4th person doesn’t make sense if three is enough, so you cut the fourth person instead.
Then, of course, the numbers still look bad in a few towns. A few locations are too close together. You close one or two. Again, it doesn’t make sense to cut your pay instead – cutting the workers actually reduces the amount of services available, but cutting your salary instead leaves the waste of an oversaturated market intact.
Your salary is only going to be cut if HR undercuts you with a cheaper manager. They’re likely to do that, if business is very stable and they just need a day to day administrator. So, they might give you a bonus for good work on terminations, then replace you with a lower level worker.
So basically, they only cut manager pay when their management needs go down, and cut employees when any other need does, like from a drop in customers meaning fewer staff needed to get through the rush.
Your parents buy you once a package of candy. It’s quite a big package, so you eat the candy until you can’t eat anymore, and then you share the rest with the friends. It’s quite a big group so everyone gets just a piece, but it’s fine, it’s better than no candy. They are happy.
Now, this happens regularly. You’re starting to get popular and get some benefits in the friend group as you bring candy often, and everyone is happy.
But one day, the package you get is smaller. And you got used to eat quite a bit of candy regularly, so you are thinking what to do now, should you take only one and share the rest with everyone or just take all for yourself. You decide, ok, I’m eating all the candy, they anyway get only one, that’s like nothing, no candy for y’all.
However, you vastly overestimated your popularity, and didn’t understand that all the other kids are letting you play only because you were giving them candy. They are not going to play with you anymore, you’ll need to find new friends now
Furthermore, you didn’t realise that your parents were giving you candy only because they thought you have lots of friends and you’re sharing it, they were giving it to all the kids, not just you. They stopped giving you anymore, as now you don’t have friends.
But hey, at least you got lots of candy in the end, instead of getting one and then hoping that the candy supply will increase again.
You’re the CEO, you ask your underling to come up with a way to save the company $2.5 million this year. What do you think the underling is going to do? Tell you to take a pay cut from your $25 million dollar a year pay or suggest that all divisions can cut their wage costs by 10% through early retirement and redundancies? Its fairly simple to work that one out.
Executives overestimate their importance AND value. The CEO of my employer makes 750k per year and couldn’t tell you what the staff actually do. Yes they have high pressure and responsibility but that is not the same as competence or value and they make inadequate and out of touch decisions all the time because their advisory boards are made exclusively of other executives, so often there’s no one even in the conversation to humble them
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