The Booz Theory: Employers Cut Wages and Keep CEO Salaries the Same

The Booz Theory: Employers Cut Wages and Keep CEO Salaries the Same
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Forget About CEO Pay Scales

The average person will always be angry (and they are right) about high CEO pay, bonuses, perks, jets, parties, houses and then there’s the women—oops, better stop there or I’ll offend some high-powered CEO somewhere.

To the average nine to fiver, salaries, bonuses and perks received by these corporate heads is not only ridiculous, it’s appalling, especially since most of us struggle from paycheck to paycheck.

It’s not just CEO salaries you should be complaining about. According to some must-have advice from Booz & Company, businesses can save dollars by cutting the wages of long-term employees or changing them to align with newbies performing the same job.

So, is this fair? Before you say yes or no, let’s look at what others are saying.

Advice From the Booz Men

No matter the topic, there’s always an expert or two (in this case three) who want to study something and three gents from Booz & Company are no different. No, Booz & Company doesn’t make Vodka or any type of alcoholic beverage, but wouldn’t it be fun if they did? But I digress, as usual. The company advertises itself as a “leading global management consulting firm.” I love companies like this—here’s a great statement I found on their “What We Do” web page:

“At Booz & Company, we work closely with clients to create and deliver essential advantage in any situation. We bring foresight and knowledge, deep functional expertise, and a practical approach to build capabilities and deliver real impact.”

A mouthful to be sure that reminds me of a political candidate who is not quite sure on which platform to run or which issue to support.

Top leaders at Booz & Company, Harry Hawkes, Albert Kent and Vikas Bhalla wrote their opinion on “Retooling Labor Costs” which appeared on the Strategy + Business website and reviewed by Sean Silverthorne of BNET.

Of course the three, Hawkes, Kent and Bhalla or the three musketeers as I shall call them here are against the average worker. They don’t want to talk about CEO pay, but instead they want “Joe the Machinist” who has worked for the same company for 25 years with no change in job duties or additional training to have his salary cut so it’s in line with co-workers who do the same job as Joe.

I gotta tell the three stooges—er I mean three musketeers—no one is going to agree with these ideas, especially the hard core unions who dislike you for even thinking up the idea!

Why Cutting Salaries Is a Bad Idea

Cutting Wages is a Bad Idea

I’m sure you’ve had more than one boss who says, “We just don’t have enough money for raises this year” or “we have a wage freeze, sorry” or “we have to cut expenses somewhere.” Don’t you love the “we” here? If it really was a “we” situation, you’d have a say and for sure you would get a raise—every year, perhaps more often.

In any event, Hawkes et al found payroll expenses could be cut dramatically if businesses would revamp their pay structure not based on tenure with the company but on progressing forward within the company.

The progressing would mean employees would stay on a constantly improving type of plan where additional training to learn the new would be required. For example, even if old Joe the Machinist will always be a machinist, perhaps his computer skills are horrible. With the Hawkes et al idea, to keep his high hourly wage, Joe would have to work hard to keep improving—take computer training for example or lose the salary he holds so dear.

Beyond additional training, Booz & Company experts feel even if Machinist Joe never received any type of promotion or change in job title and does the same job day in and day out, he still falls into the wage cut group.

So basically, if you don’t have something additional to offer or find a way to show your company your great personal improvement program, you may find yourself making the wage of a less-tenured co-worker instead of the wage your tenure ensures.

Whose Fault Is It?

The guys at Booz say it’s not just wages either causing payroll expenses to skyrocket. Often with tenure comes other opportunities such as additional retirement programs, more health care options and some perks such as a company car. All of these cost a company money.

So are the musketeers blaming employers for not watching over their payroll expenses?

Ask any business owner what their largest expense is and they will tell you it’s payroll. Paying people is a major expense, albeit a needed one, and doesn’t just include salaries paid out. It includes workman’s compensation and unemployment insurance payments, matched FICA taxes, health care (if offered)—even paid vacation, personal and sick time cost real dollars so we should all be able to agree payroll costs employers a big heap of money.

But, is cutting the wages of someone who has worked their entire career with one company, is always on time and diligent in performing their duties a good tactical plan here? I think not folks.

In the BNET post, it was noted that “Microsoft routinely lets go a fixed percentage of below-par producers annually.” I would bet these employees are told this upon hire as a motivational tool, not on payday when they open their checks and see salaries cut in half.

To be fair, the musketeers do call this cutting of wages to meet employee expertise is a “dispassionate, logical way to realign them (salaries).” It certainly is, the average worker has left comment after comment on the post and they’re not happy.

Robert S for example comments: “This has got to be the most ignorant, short-sighted article I’ve ever read. These writers obviously are so out of touch with modern day workers it is ridiculous.” Most comments are similar.

The Booz Theory

The Booz Theory

There is a theory stuck in this mess offered by the chosen three from Booz & Company. First they ramble on about statistics on industry wages and how employers use MRPs, or market reference points, to determine salary ranges in their area. Hawkes et al say these MRPs usually come from “third-party sources” but I believe the U.S. Bureau of Labor Statistics offers up similar statistics for free. If you want accurate data, I guess according to the Booz men, go to a third party and pay for it right (some expense experts here!).

When the rambling is done, the Booz’s offer up four points in their theory to help retool labor costs. As they say, if “employees fall north of the norm,” employers should do one of the following:

Appropriate job categorization and responsibility adjustments – This basically means when Machinist Joe started 25 years ago, his job should have had initial salary levels and ceiling levels where he could advance in pay no further—unless of course Joe wants more responsibility or his job description changed. The only hope here for Joe would be perhaps a merit raise here and there but no salary increase. If Joe doesn’t just jump for joy here and agree with the Booz plan, he could be placed back to a level one machinist and receive a cut in pay. I’m sure Joe would not agree with this idea.

Voluntary separation – Some mega corporations already do this by offering a one-time payout and a benefits package which in the long run will cost the company less in other payroll expenses. I love this from the Booz guys: “It is critical to tell employees that the company is determined to cut costs and smooth out salary discrepancies and that after the severance program’s deadline passes, more aggressive ways to reduce wages will be considered.”

Darn tooting it’s critical guys or what it really says is, take the package or the company will have to look at other ways to save money like firing you!

Involuntary separation and performance management – Here the Booz guys don’t want to mentor employees or offer up much of a chance for newbies to improve and learn on the job. Instead, if they aren’t up to par, terminate them. Or, if they continually receive low performance reviews, fire them.

Again, where is the employee engagement here? If I worked for a company where I knew ahead of time that two bad reviews meant I would be cut, I’d always be job hunting and you can bet my resume would be in the company copy machine—all the time.

An average employee not given an appropriate amount of time to be a great employee is often the fault of the company, not the employee. Bad idea, Booz guys.

Wage reduction – At this point, I am pondering what the Booz guys are drinking? Cutting the wages of long-term employees is not a good idea. Sure your company might want to implement a personal improvement program for you but to save money so cash flows by cutting your salary? That’s a double no!

You can read the story from the Booz Guys here but jumping to the comments section is your best bet—it’s the best part of the post!

What’s Your Take

Readers of mine know I’ve been both an employee and an employer and throughout my time as an employer, I never thought the way to cut expenses was to hit employees in their pockets. Businesses can find other ways to cut expenses and yes, even cut some employee benefits, but interfering with take-home pay is darn right unfair.

What do you think and if the company you work for is considering putting the Booz Theory into action, share it with us—we’d love to hear your story.