Pay cuts may seem right, but don't overdo it

Move could hurt confidence, both within the affected organisations and in the broader economy

IN the name of solidarity - and saving costs - amid the Covid-19 outbreak, several Temasek-linked companies have announced wage freezes and bonus cuts for senior management.

Yet is there a risk that this could hurt confidence, both within the affected organisations and in the broader economy? Much depends on how consumers, businesses, and investors read the situation.

In an industry directly hit by the virus outbreak, airport and food services provider SATS was the first to take such measures in February, with a 10 per cent pay cut for management, alongside offering voluntary early retirement and no-pay leave for general employees.

In the last two weeks, firms in other sectors have made such moves. Temasek led the way with a freeze on salaries and promotion increments at all levels, while senior management had bonuses cut and were encouraged to take voluntary pay cuts.

This firm-wide move arguably had a greater potential to hurt sentiment, compared to those which followed.

SMRT Corporation's salary and bonus cuts are for management staff. Similarly, CapitaLand froze wages for managerial staff and cut pay for senior managers and board directors.

SingPost is freezing pay and promotion increments for those at assistant vice-president level and above, and cutting pay for those at senior vice-president and above.

At Singapore Airlines - another firm in a directly-hit sector - senior management have taken pay cuts, while regular employees have the option of voluntary no-pay leave. Singtel is freezing wages for all except operational and support staff.

Perhaps the most commendable approach was taken by SP Group. Directors are taking a pay cut, senior management will see smaller bonuses - but some 400 frontline staff are getting a one-time payment of S$1,500 in recognition of their dedication, and as encouragement.

By making cuts at the top but giving a small boost to rank-and-file, SP Group's approach makes it less likely that the bulk of employees will be alarmed by the cost-cutting measure.

In restricting the cuts to senior management, most of the other firms may also be seeking to do the same.

After all, the virus outbreak is already taking a toll on consumption. Retail and food and beverage outlets, already reeling from the slump in tourist numbers and widespread caution among residents, cannot afford a further blow from a fall in domestic consumer confidence.

Investment, already delayed during global uncertainty even before Covid-19, hardly needs more reasons to be postponed.

So the question is: how will these measures affect the management themselves; the employee base; and sentiment more generally?

If the impact is contained to those directly affected, then any belt-tightening on their part - even if they are big spenders - may be of limited effect, simply due to the relatively small number of individuals.

The real worry is if well-intentioned moves backfire. What is meant as a show of prudence, even reassurance - cutting pay to save jobs - could be misinterpreted as desperation, or spur employees to wonder if their turn on the chopping block is next.

The greater danger is if this fear spreads beyond affected organisations into the wider economy.

When major corporations are cutting costs so visibly, other firms might sit up and take notice. Consumers, too, might wonder if this is in anticipation of worse times ahead.

In a worst-case scenario, such gloom could result in major cutbacks on spending by firms and individuals, hurting already-struggling businesses and a beleaguered consumer sector in a self-fulfilling prophecy that ushers in recession.

Clear communication and reassurance from employers undertaking such exercises is important if we are to avoid this.