The answer to should you ever take a pay cut is generally a no. The risks rarely outweigh the benefits and it’s not worth selling yourself short for perceived benefits. However, there are many other factors that you do need to consider before making a life changing career decision for yourself and family.
Before I moved into my current role that pays $107,000 plus $20k in additional compensation, I had the chance to take a lower paying job for $70,000 plus no bonus. It was a significant pay cut to my then compensation of $70,000 + $35,000 in additional comp. The upside of the $70k job was that the work life balance was perceived to be good.
I had actually already verbally committed to the job. However, when another company swooped in with another offer, I reneged and revoked my acceptance. That’s one of the drawbacks of offering “at-will” employment, employees can back out at any point in time.
Knowing what I know how, I am phenomenally glad that I declined the job at the end of the day. Even though my company pays me six figures in compensation, I still feel underpaid. The amount of value and work that I do on a day to day basis is worth more than my compensation. Significantly more.
Therefore, if I feel this way with a six figure salary, imagine how much worse I would feel with a $70,000 salary. Significantly worse. It’s generally time consuming in order to switch jobs so I would have had to work hard just to get back to even.
There are definitely MANY other factors that you need to consider as well. Considering just the lower pay is one dimensional line of thinking, something you don’t want to do.
What is a Pay Cut?
First, what exactly is a pay cut? A pay cut is a decrease in pay, salary, or compensation. However, it takes many forms. The two different forms are as below.
1) Pay Cut Due to Job Change
An obvious pay cut is one that happened because you took a lower paying job. This is one of the most common kinds out there. One of the reasons why you might take this route is because of a promise of a better work-life balance. Or it may be because you want to get your foot in the door of a completely new industry.
When I was contemplating the lower paying job, it was to move from a high stress banking world to a low stress corporate finance world. Not only would the hours be better, the work would not be as stressful. One of the interview questions they asked me was “what would you do during your down time?”
I knew that meant that this job had a lot of downtime. I interned at a corporate finance role before and the sheer amount of time where the company paid me to do nothing was mind boggling. There is a chance I would have started a business on the side with all of the free time, but we’ll never find out the answer.
This is a very common reason why people contemplate accepting a job offer for less pay.
2) Pay Cut Due to Economic Hard Times
The second type of a pay cut is due to economic hard times. When the worldwide pandemic hit in 2020, companies were desperately trying to cut as much costs as they can. Companies usually cut labor expenses before cutting any other expenses. Therefore, companies were cutting salaries left and right.
Companies will usually consider this option before deciding to lay off any personnel. Why is that? They don’t have to pay a severance in connection with this decision. However, the severance package is still up to their discretion at the end of the day.
This kind of lower pay usually isn’t negotiable. It’s either “take it or leave the company” kind of a deal.
If you leave of your own accord, well, that’s music to their ears! Not only do companies not have to pay you severance, they don’t have to pay you at all. This is the worst kind of a cut in salary that you can experience. There’s fewer options offered to you, compared to the alternative.
Is a Pay Cut Worth it?
Voluntary pay cuts to move to another “less stress company” are generally almost always never worth it. I’ll give you a dirty open secret. EVERY company, regardless of how much they pay you, feels entitled to your time. EVERY company wants to give you more work without giving up more pay.
Remember that pride is bad. Every company uses the “overworking is a badge of honor” against you. Don’t give up more work without expecting more pay. Don’t sell yourself short. Just because the new company offers a 50% pay cut, that doesn’t mean you work 20 hours a week.
The number of hours per week you work is standardized for any full time position. Instead of taking lower pay, look for another job that has all of the qualities you are looking for for similar or higher pay. Even if you don’t believe they’re out there, the companies are out there.
It may take some time in order to get there and change jobs, something like six months to two years. However, don’t give up just when you’re about to strike some major gold. Always keep looking and talk to different people and recruiters. You never know when an opportunity is going to open up.
Why would you give up what you already have for a lower benefit? That doesn’t make sense. During the negotiation phase, a company asked me, “what if we offer you lower pay? How will you think about your own lifestyle?” At the moment I replied with “I’ll consider it” but I instantly knew I would never take the offer.
When they gave me the offer, of course I rejected it. There’s no point in taking lower pay when I’m going to be working just as hard as my current role.
Exceptions to Not Accepting a Wage Cut
Even though you should generally not accept a wage cut, that doesn’t mean that you should NEVER accept a wage cut. There are actually legitimate times when it is in your best interest to entertain and accept a salary cut. Personal finance advice is rarely a one size fits all and this situation is no different.
It can actually be a strategic move that maximizes not just your long term earning potential but happiness as well. Therefore, take these rare exceptions and apply it to your own life and see if they are valid reasons. Most of the times, the reasons aren’t valid but that doesn’t mean that there aren’t good reasons to accept lower pay.
Before I go further into the exceptions to not take a salary cut, can I ask for you to SMASH that social share button and post to your favorite social media? With unprecedented actions that are going on in the labor market, there’s a good chance your friends are in a similar situation. They may just not know what to do when they’re in this position.
If you can completely change your friend’s livelihood trajectory for the better with doing a free thing like sharing an article, why wouldn’t you? I know that I never talked about taking lower pay with any of my friends and I wish someone guided the process with me.
Now I know exactly what to do if I was put into the situation. So with that said, let’s go over the exceptions!
1) When Both Offers are Still High Income
When your current job versus the new opportunity is still “high income”, then you can consider taking a wage cut. For example, if your compensation moves down from $300,000 to $200,000, it’s really not going to make a huge impact to the quality of your life.
Even if you live in a high cost of living state, it’s difficult to spend the entire salary of $200,000, let alone $100,000 of that. I live on a budget of ~$25,000 per year and it’s increasingly difficult to spend more money every year. Why? Fixed expenses. What I spend in one year, I don’t have to spend the next year.
Therefore, when you budget properly and both are still high income but with true less stress, then it’s completely worth it. Bosses feel entitled to yell at you and treat you like dirt if you make $300,000 a year and are relatively young. Therefore, if a $200,000 job removes all of that, then it’s more than worth it.
Misery is not worth the additional dollar in your bank account.
2) When You Take a Pay Cut due to Economic Conditions
When the company forces you to take a pay cut due to economic conditions and you absolutely need the job, then you should take it. All you can do in this situation is to bide your time and interview at other companies until you can snatch up a good offer. Your options are limited in this scenario, especially if you need the job to survive.
You have no other good options than to keep looking at other companies or until the economy recovers. In the midst of the financial crisis, I saw a person in a “Managing Director” role get downgraded all the way down to an “Analyst” role after getting laid off. Yikes, he had no other choice.
However, The great situation about a pay cut due to economic conditions is that companies are more receptive to listening to any offers of laying you off. If you don’t need the job, then it can be a strategic move to request the company to lay you off if you don’t want to accept the lower pay.
That is when you’re negotiating from a position of strength, not weakness. Therefore, always try to get to this position of strength. You never know when the economy will turn sour at the touch of a button.
Can a Company Legally Do a Pay Cut?
In general, companies are legally allowed to do a pay cut. The United States’ laws heavily favor corporations instead of employees. As long as they do not discriminate and target a protected class based on race, age, gender, etc. then they can implement a pay cut. Also, the lower pay still needs to be higher than minimum wage as well.
Another exception is if you have an employment contract already set in place. Then the company needs to adhere to the legally binding contract that you both agreed to. However, employment agreements and contracts are becoming rarer and rarer these days.
Additionally, the company can cut your pay whenever they want without ample notice. Most employment agreements are “at-will” employment, meaning companies can fire, hire, and demote you whenever they want. They don’t have to justify and provide you with a reason, either.
It’s startling just how much legal power companies have over employees. They have tremendous power and leverage over your livelihood not just for yourself but for your family as well. However, that is the world we live in unfortunately.
It is more important than ever to have a side hustle to have a secondary income source to fall back on. Don’t let companies have this much legal power and leverage over your life and family’s life. The government will usually side with companies in most cases, anyway.
Protect yourself and depend on nobody else but yourself.
Which Companies Did a Pay Cut Recently?
With the onslaught of the pandemic, let’s go over the companies who implemented a pay cut.
The interesting idea that connects all of these companies is that they are multi-billion dollar companies. They could have EASILY weathered the storm for at least the next two years or so. However, they chose not to because they wanted to save as much money as they can and protect their profits.
In fact, after Dell implemented a 401(k) cut in May 2020, their stock price hit all time highs, one after another.
In the midst of a pandemic when people needed to protect their livelihoods the most, multi-billion dollar companies cut pay and laid off employees. Companies do not care about your well being. Protect yourself and throw loyalty out the window.
Companies will not hesitate to get rid of you the second they feel like they don’t need you. My company fortunately didn’t cut my pay. However, I’m not delusional to think that they wouldn’t have hesitated to get rid of me if they felt like they needed to.
Companies Offer the Moon During Interviews
Be very wary of companies that offer the moon and campaign like no one’s business during interviews to convince you to take a pay cut. Companies will do or say anything in order to get a quality employee for a very cheap price. They’ll talk about how great the work culture is or how great the people are.
It’s all just words in order to get you to join. If all they have to give up is pride and words to get a high quality employee to take a pay cut, they’ll do it. They’ll do whatever it takes to get you on board if you can help with their interests. Be very careful with companies who offer the moon and try hard to convince you.
If companies boast about how great their office culture, people, and hours are, remember that you can’t pay your bills with those. Whether you like it or not, you need to pay with cold hard cash. Therefore, you need cold hard cash in exchange for your services. For a fair price, at that.
Make your own decisions on how great the company will be once you join. Be skeptical and be very wary. Think about your past jobs. Have you really been happy working hard for somebody else to help them be rich? More than likely not. Therefore, don’t be convinced that you will be happy working for them.
Talk to other employees in the company. Ask about their work life balance and the office culture. HR will say anything in order to protect the company’s interests. They are the ones who are most likely to talk up the company. Listen to all of their selling points with skepticism. Then make a decision whether the pay cut is worth it.
Interesting rundown on this subject, David. In my own experience, I worked in a field that had rapidly changing technology and tools. In example, a job that took six of us in 1988 took just one of us in 1998. My plan to ‘outlast’ the technology-and-software advancement was not working out; I had to make the difficult decision to take a step backwards, take less pay, and embrace the (rare) opportunity to learn the software on-the-job. Ugh! I’m still not happy about it, as you can tell.:-) That field (Project Controls) is still compressing, and a colleague and friend of many decades recently took a position equivalent to the one he was in 25 years ago (same employer, too!). It is hard to do sometimes, but a lesson I learned from ‘Millionaire Next Door’ is to ‘never put pride before profit.’
Whoa, that is super interesting. That’s a very good point about not putting pride before profit. It’s frustrating when you work very hard for 2+ decades and end up in the exact same spot…
Forgive me if this is nosy and you don’t have to answer if so. Did you get to thrive in the job after taking a step backward?
Your point about frustration, after long periods of working and adding value, is so true.
For my own background, I’ve gone through a period of six years with no raise and I came out of university at a time of 10.8% unemployment rate and several years of graduates clogging the pipeline.
re: thriving – Eventually, but it took me a number of years to build new skills and find an opportunity to show my ability to add value. If I had done nothing, I would have been laid off after a short while and my future prospects would have been even worse.
Somewhat tied to my answer elsewhere, but if I could have a ‘do-over’ I would have embraced a worklife (the word ‘career’ is so pretentious for most people, Dwayne Johnson has a career but almost nobody else.) Sitting at a desk for 40 years can be awfully intimidating and discouraging. Glad you are looking at alternative paths like social media and crypto, you have right there tripled your paths to success, David!
Thank you JayCeezy! And I knew that you were the kind of person who was going to figure things out and come out on top!
If it were me, I would have been ignorant that my skillsets were getting outdated and decided to stay at the same spot and inevitably get laid off. I think I’m out of the “I want to work as hard as I want for my employer” phase, which isn’t really the best mindset when navigating through a constantly changing workplace…