"Many employers underestimate the value of hardworking, faithful employees," notes John K. Skousen, a partner with the law firm of Fisher & Phillips LLP. "A company's people are far more important than any capital or other resource—they think, create and produce. For this reason, executives should carefully weigh the impact of compensation cuts and take steps to sustain long-term employee morale during the process."

Before trimming employee pay, Skousen urges employers to consider the following tips:

1. Give appropriate notice. Before taking action, become familiar with your state's specific employment laws. California, for instance, requires an employer to notify employees of any salary changes before they perform any work at the new rate of pay. Regardless of the rules, offer plenty of notice—at least one pay period—before imposing any changes to pay or before canceling alternative work schedules for cost-saving reasons. Doing so will show respect for the affected employees, offering them adequate time to make necessary adjustments.
2. Communicate openly. Be transparent when it comes to salary cuts, unless specific business concerns—including proprietary considerations—prevent the disclosure of all relevant details. Explain specifically why the changes must be made. Provide an estimated time frame for how long the changes might last, with an emphasis on the fact that changing conditions could impact the time frame. As much as possible, remain open and honest with employees in order to retain their trust, understanding and optimism for the future.
3. Time commission reductions right. Commissions generally may be changed only prospectively. If a sales-driven company must decrease employee commissions, the timing must be cautiously planned. For example, if a change is made in the middle of a monthly commission plan, administrative chaos and possible errors are likely to ensue if two different measures (the old rate and the new rate) will apply. Payment errors pose a liability to the employer; potential claims could be made; and litigation could follow. A mid-cycle commission reduction also might dim employee ambition, leading to lower production for the commission measuring period.
4. Make smart cuts, not quick cuts. When making cutbacks, employers should make prudent decisions for the long-term good of the company. For example, it generally makes good business sense to avoid making pay reductions so severe that the new salaries are absurdly below industry standards. Consult relevant associations and groups to ensure any changes are within a reasonable range that won't reflect poorly on the company. (Associations may be able to provide adjusted pay ranges to reflect salary reductions during recessionary periods.) In addition, an employer must be careful not to cut exempt employees' salaries below the level that makes them exempt. Lastly, if a company has committed to reducing salaries, the employees should see evidence that these reductions are not selective, but rather, are reflective of a general commitment to reduce costs. If the elaborate company retreat for its executives stays on the calendar but paychecks are slashed, employees are likely to become aggravated and skeptical. Also, if financial favor is given to those with seniority, frustrated lower-level employees might be more inclined to file a lawsuit or other administrative claim. In short, employers should take precautions to maintain credibility when costs must be cut. Fair play in cost-cutting will help maintain good morale even when times are tough and salaries are impacted.
5. Pause before presenting the news. Companies should handle the salary-cutting announcement with care. Present the news in the most positive way possible. If employees know that the alternative may be termination, for instance, they actually may be thankful for a pay decrease. The employer might also consider offering a cost-effective, performance-based bonus program to empower and incentivize employees to make up for lost pay. Overall, if the news is well-delivered and employees buy into the paradigm, a company can potentially have a full staff of highly skilled team members, working for less.

Source: Fisher & Phillips LLP; http://www.laborlawyers.com.