When to take a pay cut

Announce your next career move involves a pay cut and watch people register their surprise. But is it all that unusual? Under what circumstances might a pay cut be a good idea?

Peter Harbidge, general manager for recruitment firm Hudson, says changes in career direction and the desire for a better family life are two key reasons people opt for fewer work hours and a pay cut.

"People increasingly consider reducing the hours they work and reduced pay is about to be on the HR agenda for many companies," says Harbidge. He says some people negotiate a base salary scaled down according to the hours they work, but with a variable rate that allows them to make as much, if not more than before, by performing well.

"I have seen people take a drop in base salary but increase their total earnings. If they were on a 60K base and 30K variable and go to a 50K base and 50K variable, they're actually up by 10K if they meet performance targets," says Harbidge. He says the trick is for employees to negotiate what they want.

Kim Smith, senior consultant for recruiter Robert Half Finance and Accounting, says some people cut hours and pay because they want to start up a self employed business on the side. She should know; Smith works a four-day work week for Robert Half so she has more time to develop a new property business unrelated to her recruitment role.

"I negotiated the change and a different pay structure so if I manage to do five days work in four, I am paid the same as before," says Smith.

Such negotiation is not only the domain of unions or professional career climbers - factory workers and administrative assistants on individual employment contracts can do the same. But what happens when a business gets into trouble - can employees ask for a lower pay rate to avoid redundancy?

Employment lawyer Don Mackinnon, principal for Mackinnon and Associates, says while no one can be made to take a pay cut and pay can't be unilaterally reduced, pay cuts can be agreed and sometimes are agreed as alternatives to redundancy.

"A position may no longer be cost effective but an employer is required by law to look for alternatives before implementing a redundancy. Staff also have to be given the chance to also put forward their own ideas. During this process, cutting pay, benefits or hours are sometimes put forward as viable alternatives to reducing head count," says Mackinnon. He says this is the present discussion between Air New Zealand and its engineers.

Smith says in countries such as the US, once the economy starts to downturn it's quite common for people to take a pay cut to hold onto their jobs. She says New Zealand employers will find a way around legislation when they're in trouble and when employees indicate that a pay cut is preferable to redundancy.

"Cyclically, it's inevitable there will be a downturn sooner or later and it will be interesting to see what New Zealand employers do with it," says Smith.

Forced pay cuts aside, Harbidge says people will willingly accept a pay cut if they want to move into a different role or company. Salary is a reflection of the commercial value a person has to an organisation so if they are in a new role with less knowledge and technical experience then their new salary may be less than they earned before, says Harbidge. And Smith guarantees someone moving from a smaller company to a large corporate will be offered a lower rate of pay than an equal candidate from a large company because the first candidate is deemed to have less corporate experience.

Some people also take a step back in pay while building new skills - for example, finance and accounting professionals who want to move into HR or marketing. In these situations a pay cut can be viewed as part of overall forward career movement and some employers soften the blow by funding or subsidising the new employee to undergo training or professional development. Such factors mean the industry salary guides issued regularly by recruiters are only designed to be a mid point, says Harbidge.

"Companies will pay what they can pay unless they're in the public sector or they are a large organisation," he says.

Smith says pay cuts can be viewed as a strategic move - and if they're not it can be because people get too hung up on moving between jobs based on increasing pay and loftier titles.

"The careers that go really well belong to people who have accumulated the skills they needed to reach an ultimate personal career goal regardless of pay. For that, you have to have an ultimate goal in the first place," says Smith.

For Shelley Piper, 32, that ultimate goal has been fulfilled despite losing more than $30,000 in remuneration. Previously directing marketing manager for Hanover Finance, Piper left Hanover just before a performance bonus worth between $30,000 and $40,000 was due in order to secure her current role as marketing manager for ChildFund New Zealand (previously Christian Children's Fund).

"Hanover offered me other things if I would stay, but these [not-for-profit] positions are far and few between. I knew my job there would not give me the opportunity to give back to society or raise money for children instead of shareholders," says Piper.

If not-for-profit workers take a pay cut to chase their dreams, so do new immigrants and returning ex pats. Smith says people returning to New Zealand often take a pay cut as they move from a large employment market back to New Zealand's smaller one; in extreme cases the difference can be $100,000.

"Someone with investment banking experience can earn $200,000 in London but when they arrive in New Zealand they can't find a job in investment banking and eventually settle for a position paying $100,000. I have seen that happen," says Smith.

She says while pay cuts are ultimately a good decision for people who want to live here and benefit from New Zealand's lifestyle, expat New Zealanders often don't realise they can work themselves out of the New Zealand market through highly paid and specialised international roles. Or they may expect their New Zealand pay rate to be commensurate with their UK salary rate once the exchange rate is applied - an unrealistic expectation that rarely pans out because the two employment markets are so different, says Smith. She says New Zealand's pay scale is less than Sydney's and one company even relocated from Auckland to Whangarei because they knew they could hire labour for less there. Relocating a career from Auckland to Hamilton or from Wellington to Napier may mean accepting less pay, perhaps permanently. However, if it results in more time with family or the launch of a long-held dream, it may just be worth it.


Famous pay cuts

* US lawyer John Roberts left Washington law firm Hogan and Hartson where he was a partner earning in excess of $1 million a year, for a seat on the US Court of Appeals for the District of Columbia Circuit and a salary of $171,800. By 2005 his net worth had increased by $1.5 million through a smart investment portfolio

* In August 2005, basketballer Shaquille O'Neal signed a contract with the US Miami HEAT team which saw him take a pay cut of $50 million to enable the HEAT team to buy better players. (O'Neal's pay was reduced from $150 million to $100 million over five years).

* Don Brash, now leader of the National Party, took a $400,000 pay cut when he moved from his position as Reserve Bank Governor to Member of Parliament.