Salary Freeze

Salary Freeze

Investopedia / Mira Norian

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."

Key Takeaways

  • A salary freeze is when a company suspends salary or wage increases for a temporary period of time.
  • Financial constraints or financial difficulty are usually the reasons that a salary freeze is implemented.
  • The goal of a salary freeze is to cut expenses in difficult times to improve the company's bottom line.
  • Salary freezes are often implemented to avoid laying off workers or enacting hiring freezes.
  • Employee morale is usually reduced as a result of salary freezes and it is common for employees to leave the firm during this period.

Understanding a 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 to 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 employer, whether in the public or private sectors.

A salary freeze may be used in tandem with or instead 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 employees.

Salary Freeze Best Practices

Companies that utilize a salary freeze should consider the effect one will have on employees. Many workers are primarily motivated 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 on 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. The key is to convey gratitude to employees so that they believe that they are appreciated, while also reinforcing the fact that the salary freeze measure is both temporary and necessary.

Example of a Salary Freeze

The economy enters a recession and Company ABC suffers significant losses in the third and fourth quarters. The recession is expected to last at least another year given current market indicators. To stem its financial losses, Company ABC implements a salary freeze.

In the first quarter of the new year, Company ABC typically increases employee salaries by 3% and pays out a bonus. Because of the salary freeze that was enacted, employees are notified that they will not be receiving a 3% pay raise this year nor any bonus.

As a result of the salary freeze, Company ABC starts to experience a departure of employees who are leaving because of the future uncertainty of the firm and because they are not being financially compensated for their work as expected.

To stem the flow of departing employees, Company ABC offers all employees $200 per month to go towards commuting costs as well as an announcement that the hiring freeze will only last six months, allaying any employee fears of a prolonged period of difficulty for the firm.

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