The danger of pay freezes: Gottliebsen

One of the most popular management strategies at the moment, in responding to the economic crisis, is to have a pay freeze. While this is part of a general containment of high top executive salaries, sometimes lowering or freezing salaries can cause problems down the line.

This week, Telstra announced that it has frozen the pay of its top 300 executives for at least 12 months. Other senior staff were able to receive average pay increases of no more than 2%.

The trouble with this strategy is that when rivals see that a company has undertaken a pay freeze, they often consider making an offer to a key staff member or members of their rival, knowing that it will be hard to counter the bid.

To overcome any serious challenge to their skills base, companies often undertake all sorts of gymnastics to give key people more money in a way that does not show up as a pay rise. In short, pay freezes are a strategy that will work for a while, but in dynamic industries they have a short life span.

Nothing better illustrates what can happen than the recent events in the UK banking industry, where the attempt to bring bloated salaries down has backfired. In the last six months or so, Barclays Capital, Credit Suisse and Deutsche Bank have recruited hundreds of senior bankers from troubled groups like Merrill and UBS – who lost about a quarter of their best people before they decided to defend their remaining staff.

Had they not taken defensive action they could have effectively been put out of business because their rivals would have the key staff and would gain the best business (RBS chief to earn £9.6 million, June 21).

Of course, when your rivals come raiding staff, one of the joys for enterprises being poached occurs when those rivals select the wrong person – someone everyone wanted to leave but who never did. It can happen because sometimes rivals do not understand where the skills base is concentrated in a competitor and may be tempted to hire the person they know well.

This article first appeared on Business Spectator.