During a severe revenue crisis, should companies avoid layoffs via broad salary cuts rather than cutting headcount?

Davis Smith · published Dec 15, 2023

In a crisis, shared pay cuts across the whole company — with the founder and executives taking the largest ones — are a better response than layoffs

Everyone experiencing a little pain together saves everyone's jobs and rallies the team; the company later repaid staff in full with bonuses

Scope: Cotopaxi's 2020 experience; team later made whole with bonuses

34:26 20VC: Cotopaxi: From Selling $6M of Pool Tables to Scaling $150M in Revenues and Challenging Patagonia, Fundraising Lessons from 100+ Rejections & What Founders Do Not Understand About VC with Davis Smith, Founder @ Cotopaxi

Markus Villig · published Nov 13, 2024

Refusing layoffs during COVID and instead cutting all salaries ~20% was the right bet, because keeping the team intact let Bolt accelerate out of the downturn faster than competitors who cut 30-50% of staff

Being the only company in the industry with zero layoffs produced a massive morale boost — some people volunteered 40% pay cuts — and preserved the team needed to rebound

Scope: described as a gamble on the crisis passing within six months; revenue had dropped 85%

54:08 20VC: Bolt; The Most Insane Story in Startups | Turning a $5K Loan into an $8BN Company | Why Every VC Turned Down One of Europe's Biggest Winners | Competing with Uber & The Future of Micromobility and Self-Driving

Jason Lemkin · published Aug 23, 2023

The correct founder response to a cash crunch is to hunker down — cut your own salary to zero, invest your own money, and shift to zero-cost acquisition channels — rather than to do a layoff

He took no salary for eighteen months and focused on viral acquisition, which costs nothing, so he could hire someone to replace himself

10:53 Founder cuts own salary and shifts to zero cost growth rather than layoff

Paul Graham · published Dec 2014

In most startups expenses are people, so cutting expenses means firing people — and the easy case is people you already know you should fire but are in denial about.

Deciding to fire is usually hard, but not when the decision has already effectively been made and only denial is holding it up.

source Firing already known underperformers is the easy first cut when expenses must shrink

Paul Graham · published Dec 2014

Cutting salaries is a weak solution that only works when the shortfall is small; otherwise it merely postpones the problem and employees will see that.

If a small cut gets you over the profitability threshold you can make the case; otherwise the postponement is obvious to the people being asked to take less.

source Salary cuts only work for small shortfalls otherwise they merely postpone the problem

Paul Graham · published Dec 2014

If overhiring caused the trouble, the company is broken and should shrink first and then figure out what direction to grow in.

Hiring 15 people before knowing what you're building makes it harder to figure that out, and those people may not be the ones you need; flying the company into the ground with them aboard does them no favors since they'll lose their jobs anyway.

source Shrink headcount first then decide direction when overhiring caused the trouble

Paul Graham · published Dec 2014

If high founder salaries are the source of the problem, founders should cut their own pay to the minimum they need if that gets the company to profitability.

source Founders should cut their own salary first if that alone restores profitability