Salary Freeze

What is a salary freeze?

A salary freeze, sometimes called a pay freeze, occurs when a company suspends salary or wage increases for a specific period of time, usually due to financial constraints. Organizations enact salary freezes in hopes of improving the bottom-line results by keeping fixed costs under control. 

A company may implement a salary freeze for many reasons. One of the main reasons being a considerable dip in the economy, causing a recession. Other reasons to freeze employee salaries include an internal restructuring through mergers or acquisitions and a pay market practice initiative due to a re-evaluation of pay bands.

The goal of a salary freeze is to limit expenses in difficult times to improve the company's bottom line. While a salary freeze is never ideal, it can be especially detrimental to employee morale, and a company may end up losing valuable talent. Compensation management software is used during a salary freeze to adjust policies and pause pay adjustments. Once the freeze is over, these tools can help facilitate diverse bonus structures for employees.

Types of salary freezes

When carrying out a salary freeze, an organization can choose between two types. These two types are:

• Freeze basic salary: The implication that only an employee’s basic salary would be held constant. Fixed pay elements would be reviewed to eliminate potential tension amongst employees and help boost morale.
• Freeze guaranteed pay: When an organization freezes all items tied to basic salary. When choosing this type, a company should do its best not to prolong this situation so that retention doesn’t become a challenge.

Benefits of a salary freeze

Despite the fact that a salary freeze can be a difficult time for an organization, there are a few benefits to the practice. Some key  benefits include the following:

• Improve bottom line: Cutting expenses with a salary freeze can boost an organization's net income.
• Evade a shutdown: A salary freeze can keep a company afloat and in business for as long as possible. 
• Avoid layoffs: Lowering payroll costs during a salary freeze helps organizations avoid laying off employees. This is especially beneficial if the economy is in a recession and there aren’t many jobs for laid-off employees.
• May only affect top employees: Depending on the severity of a company’s financial situation, management can choose to instill a salary freeze only for senior-level or C-suite employees. 
• Show employee appreciation: A salary freeze can present an opportunity for companies to show they appreciate their employees in other ways. In addition to avoiding layoffs, managers can find other new ways to thank team members for their hard work.

Salary freeze best practices

There are best practices organizations should follow when going through a salary freeze to ensure it’s as painless for employees as possible. These are:

• Proper communication with employees: Managers need to properly communicate with employees that they will not be receiving a raise or merit pay – especially top-performers whose continued outperformance will be needed to get the company back on track. This requires empathy and understanding.

• Transparency with employees: Managers need to be transparent with employees as to why the decision to enact a salary freeze was made. Staff members need to understand that a salary freeze is both necessary and temporary.

• Provide alternative compensation means: An organization may want to consider other ways to compensate employees. This could be more flexible hours, more paid time off, telecommuting privileges, or other small perks. Doing so helps employees still feel appreciated and valued by the organization.

How to communicate a salary freeze

When an organization has decided to instate a salary freeze, proper communication can make or break how employees react. Even if employees are given information about the salary freeze, like an all-hands meeting, it’s still best to send written communication that can be referenced at any time.