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Jan05

Can one reduce salary for employee underperformance?

Employee is on six month trial and has not come to the required standards, may i now reduce salary?

Yes, but there are much better ways to handle this problem.

An employer can legally reduce any employees salary at any time, for any reason or for no reason (as long as the state and minimum wage laws are followed.) So you do not need to wait 6 months to reduce the employees salary. The employee then has the option of accepting the lower salary, or quitting. In most states, an employee who quits due to a salary decrease can collect unemployment benefits.

We have to ask, what is your goal in decreasing the employees salary? Is it to improve his or her performance? Because it is likely to have the opposite result. If you decrease the employees salary to 50%, he or she will now put forth 50% of the former effort — which was not good enough, to begin with.

There are a number of reasons why an employee would not meet performance goals: lack of ability, not working hard enough, outside factors (such as a poor economy effecting sales), lack of training, lack of motivation. None of those causes is improved by reducing the employees salary. And the employees motivation is going to hit a new low, after having his salary reduced.

If the employee is not performing up to your standards, the simple solution is to fire him and hire a new employee. Why would you want to keep someone who is ineffective in the job, at any salary? Either the employee meets your minimum performance standards, or they do not. A better tactic would be to hire a new employee at the lower salary, with a promise that the employees salary will be increased to a specific level, if he  meets certain performance standards. To be fair, put the agreement in writing. Offering an incentive for good performance is often much more effective than the threat of punishment.

If you are determined to keep this employee, then a better plan would be to directly tie performance to income. Go ahead and reduce the employees salary, but offer a bonus plan that will enable the employee to earn as much or more as the old salary — if certain performance goals are met. Suppose you hoped the new salesperson Tim would sell $1 million of products, in return for his $100,000 salary. Tim has only sold 25% of that. Change Tims salary to $50,000 with a $50,000 bonus if sales reach $1 million, and a $60,000 bonus if they are above $1.1 million. (It would be more effective to break the bonuses down into monthly or quarterly payments.) Put the agreement in writing, to eliminate any misunderstandings.

If the employee is not a salesperson, create a performance goal that is meaningful in that position.  This tactic will motivate the employee and is likely to improve performance, while simply cutting wages is likely to decrease performance.

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This entry was posted on Tuesday, January 5th, 2010 at 10:34 am and is filed under
Compensation, Human Resources Management.
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