A salary freeze is a cost-cutting measure typically taken by organizations that are experiencing or anticipating financial difficulties. This type of action is one that many workers will experience at some point in their careers. The process involves holding employee monetary compensation steady, with no cost-of-living or merit increases in pay. Salary freezes are commonplace during recessions, as employers seek to lower payroll costs without resorting to layoffs.
When financial problems begin to affect a company, one of the first measures usually taken is an attempt to cut costs. For example, if an employer's annual budget includes a cost-of-living increase of 5 percent each year, a salary freeze could effectively reduce budget expenditures, thereby reducing future payroll costs. Not allowing merit increases as part of a salary freeze serves the same purpose, thereby restricting budget increases in the current fiscal year. There could be benefits to employee morale and the monetary bottom line if the salary freeze applies to management and executive employees, as well as the rank and file employees.
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Recessionary periods almost always involve salary freezes as soon as the threat of recession is recognized. A salary freeze may often be accompanied by a hiring freeze, thereby preventing additional payroll costs from being added. Benefit freezes are also common during recessions, thereby saving the employer's budget at the cost of forcing increased premium payments for items like health insurance if the employer's group plan costs increase. A salary freeze might even be instituted by an employer when the economy as a whole is stable or improving if that employer finds itself pressured by competition or the weakness of its particular sector of the economy. A potential bankruptcy risk, regardless of the cause, typically needs to be taken seriously and addressed by whatever means are available.
Instituting a salary freeze may be only the first cost-cutting measure taken by an employer. The intent in most cases is to avoid a general layoff, which could have distinctly negative effects on employee morale and the wider economy as a whole. A freeze itself could have unintended consequences for the employer's budget — less money placed in the pockets of its employees means less money stimulating demand for the employer's product or services. During a recession, the combined effect of numerous employers instituting salary freezes can actually make the situation worse — society could cut back on spending, thus reducing demand for goods, which could further damage employer balance sheets and drive additional rounds of cost-cutting. If the only other options are cuts in compensation or a general layoff, however, a salary freeze in conjunction with a hiring freeze and other expense reductions could help to stabilize an employer during unstable times.