What is a 'Salary Freeze'

A salary freeze refers to when a company suspends salary or wage increases for a period of time, typically due to financial constraints. By freezing salary increases for a certain period, an employer is hoping that the organization will be able to produce better bottom line results by keeping fixed costs controlled. The downside of a salary freeze for a company is that employee morale will typically take a hit and the firm may end up losing valuable employees. A salary freeze may also be referred to as a "pay freeze."

Breaking Down 'Salary Freeze'

Salary freezes are meant to be temporary measures enacted to help distressed companies avoid layoffs or hiring freezes. Once the company is in a better financial position, a salary freeze is likely be lifted. Salary freezes tend to be employed by companies that award raises at regular intervals, such as with each quarter. That way the effect on a company's bottom line is more easily seen and projected. Salary freezes may be employed by any kind of employer, whether in the public or private sectors.

A salary freeze may be used in tandem with or in lieu of a hiring freeze, which is when an employer temporarily halts non-essential hiring to reduce costs, usually due to financial constraints. Companies have many options in how they may execute a salary freeze. It may communicate in advance how long a salary freeze will last. A company may also limit salary freezes to certain levels of employee.

Salary Freeze Best Practices

Companies that utilize a salary freeze should consider the effect on will have on employees. Many workers are primarily motived by compensation, and any news that their hard work or years of performance will not be rewarded may trigger dissatisfaction. This may be especially true with key, top-performing employees whose continued outperformance will be needed to help get a company back of solid ground. As such, managers who have to tell any employee — and especially a top-performing employee — that they will not be receiving a raise requires a degree of empathy.

Managers should level with workers and explain why the decision was made, as well as do what they can to provide alternate means of compensating workers. For example, a manager may have the authority to allow greater flexibility with hours, telecommuting privileges, or extra vacation time. They may also be able to offer small perks, such as a company mobile phone, theater tickets or memberships. They key is to convey gratitude to employees so that they believe that they are appreciated, while also reinforcing that fact that the salary freeze measure is both temporary and necessary.

Salary Freeze Example

In 2010, during the depths of the Great Recession, President Barack Obama said this of a necessary salary freeze for federal workers: "The hard truth is that getting this deficit under control is going to require some broad sacrifice, and that sacrifice must be shared by employees of the federal government," he said, calling them "patriots who love their country," and adding, "I’m asking civil servants to do what they've always done."

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