Ask HN: Why don't startups running out of cash cut all salaries by a % instead?

[pHollda]

Why don't startups running out of cash temporarily cut all salaries by a % instead of firing a % of staff?

If you can comfortably decide who to cut in a bad financial position, weren't you hiring poorly in the first place? And how does firing affect morale and team spirit Vs cutting everyone's salary?

[rmk]

Because employees are not represented by unions? If 100% of a person's work is going to be useless, why should he get a 20% pay cut, or rather, 80% pay? And if 100% of a person's work is useful, he'd immediately start heading for the exits if he got a 20% solidarity cut against his will.

This is seen very clearly in sales departments, which simply do not have such notions of solidarity. It's usually a zero-sum game where if you do not bring in a sale, your rival in the organization will and pocket the spiffs, commissions, and grow his rolodex to take to the next gig. Imagine giving a top salesperson a 20% solidarity cut. He will be out the door in a heartbeat, and take his friends with him!

Startups cut employees when they want to conserve cash (when funding environment becomes much tougher and there's more competition for the same amount of money, investors start calling the shots with participation and other measures to protect their stakes and get better deals), or when the business itself goes into negative growth territory. In the former, R&D is cut while sales investment is held the same (or perhaps even increased), whereas in the latter, R&D is cut deeply and sales (and marketing) investments within the company shoot up. Either way, R&D gets a hit.

EDIT: If the company has product, it is almost always R&D folks that will be canned first, because the company can temporarily hit the brakes on improvements and new products/adjacent market penetration activity, while growing sales to get out of the mess. It is almost unheard of for sales folks to be fired if the growth is still positive or close to zero, because that would be an instant death sentence for the company.

[sn0w_crash]

Cutting salary is a nonstarter because those individuals will move on to other companies to regain the salary they had. Cutting headcount is necessary if you

A. Made poor hiring decisions, as you alluded to, perhaps by over hiring during a period of high growth or expected growth. This happens often with startups who just raised a ton of cash and feel like they need to spend it.

B. You have a good stable business but your revenue outlook has changed and you need to adjust expenses. There is no reason to keep people onboard who simply are no longer in the budget. Doing so would be an irresponsible decision that negatively impacts everyone at the company, it’s shareholders, and (if it fails) customers too.

There are other reasons but I think these two are relevant to your question

[pHollda → sn0w_crash]

Edited the question to include 'temporary'. You would pay them back in the future, after the company has recovered from the economic setback.

I'm asking the question in the context of the current downturn. Say the need to reduce burn were not a result of poor hiring decisions, but larger macro reasons like difficulty raising funding in the face of a general downturn.

[bombcar → pHollda]

It has been done in some cases (small startups, for example) - I was involved in one where the boss pay went to $1 and everyone went to minimum wage for a bit until funding came in.

First time it worked and we got back paid, second time boss recommended everyone take the offer but also start looking for work.

[jasonkester]

If you do,layoffs, you will lose your worst people. If you cut salaries, you will lose your best people.

Good developers know their market rate. And they know hat your problems aren’t their problems.

[schroeding → jasonkester]

> If you do layoffs, you will lose your worst people

... if you actually fire the worst (performing) developers, which is not a given. If you're unable to identify them, you can also loose your best developers :D

[mytailorisrich]

In general you cannot cut salaries. You can propose it an employees can obviously refuse.

IMHO, it can work but it is tricky to pull off.

You need everyone to agree. This requires a very good and trusting relationship between leadership and employees, and among employees.

This probably also needs to be-time limited with perhaps a promise to make it up when things improve.

All of the above finally requires that everyone believes in the company and the product enough to bet that it will succeed in1-2 years if they all sacrifice in the short term.

All of this makes it a very tall order to pull off in a startup but it's been done in large, established companies with strong leadership-employees relations (German automakers come to mind).

Lastly, pulling it off does not just mean people accept, it means they accept and they stick around rather than just making a tactical decision to accept to continue getting a salary while they loom for another job...

[rossdavidh]

First, I should mention that I have seen it happen at small startups, when all members are necessary and they are all also invested in the firm's success (e.g. they profit big-time if the startup pulls through).

Having said that, more commonly it is the case that the headcount is simply more than is needed for the current amount of revenue, so you have two choices:

1) cut all salaries, and see the most valuable employees leave, or... 2) decide for yourself which employees leave

It's kind of brutal, and it's good to avoid it when you can, but it's not often that you can.

[brudgers]

1. Running out of cash often implies changing direction because the plan that lead to the current state did not meet the timeline. Changing direction means that the some current job roles don't align with the future.

2. Even if the course remains the same, the organization can embody past decisions that are no longer relevant. For example, roles addressing earlier problems that are now sufficiently solved (with sufficiency in part determined by cash on hand).

3. Even if the course remains the same, a cash crunch can force hard decisions that were delayed by ample cash on hand. For example cutting objectively excess staff might have been avoided for its effect on moral. Running out of cash makes negative effects on moral a given.

Consider the effects on moral. Cutting salaries keeps all the negative effect on moral in the workplace. Cutting staff sends some of the negative moral effect out the door and there are fewer people to convince to stay.

[muzani]

I've been in teams where they chose to fire half the people and productivity actually went up.

It's not as simple as "manpower". More people mean more overhead. More meetings. More documentation. The code is structured in more modular ways, and you end up wrapping anti-corruption layers around more things. When there's too much communication going on, Partnership relationships take way too much overhead. So people switch to Conformist relationships, which means you can still spend half your day coding, but every now and then you spend time redoing something that nobody brought up or thought over properly.

This kind of mess is also where the low performers thrive like mushrooms. They're happy to overcommunicate and overengineer, because it covers for slow performance.

So when these people get fired, it's actually good for morale. Was hiring done poorly? Yes, every company hires poorly, and startups rarely have the luxury to afford A-listers.

[inglor_cz]

I once asked an old time enterpreneur a very similar question: "Why fire one person out of 10 if you can cut everyone's salary by 10 per cent?"

His answer: "The former pisses off on person. The latter pisses off everyone."

[coder4life]

They do. And they die then.

I was at one in 2010 that did this - we found out before Christmas our salaries were getting cut in half, to ease burn rate while we found a buyer for the company.

In four months they couldn't even pay us that anymore.

[speedgoose]

Because a few people will leave quickly and you can’t chose who. It may be a problem.

[smarri]

I know a unicorn startup who did this, 20% paycuts for everyone. They gave people more stock as a counterbalance. Eventually they gave everyone the 20% back.

[fuzzfactor]

I get the idea that they often do neither until it's too late, because they don't want anybody to know how bad it is.

[codingdave]

> If you can comfortably decide...

I would caution against assuming that such decisions are comfortable. I've never seen that be an easy decision, and even my most sociopathic boss would struggle with having to take such steps.

I do wish that such events would be more transparent, though. I've seen it happen where they fired the people who loved the place enough to fight through the troubles, while keeping the people who would have been just as happy to leave. A little bit of transparency and communication could match things up better and keep morale higher.