Most people think of their future earning potential as only going in one direction: up. But for some workers, there are legitimate reasons to reverse that trajectory and take a pay cut.
Some employees may accept reduced wages to stage a career change. Others may need to scale back on hours to act as a caregiver for a young child or family member. Some workers might agree to a decrease in compensation as part of a move to a new industry or a lower-cost city.
But not all pay cut decisions are created equal. Sometimes, they’re a good idea. And sometimes, the risks outweigh the rewards. Here’s what to know about when – and why – to take a pay cut.
Examine your reasons. “The first part [of taking a pay cut] is to make sure you’ve thought it through,” says Joe Weinlick, chief marketing officer at Nexxt, a recruitment media company. “Make sure the move’s being made for the right reasons.”
Good reasons may include changing careers, starting your own business or entering a new industry. An entry-level worker, for example, might accept a lower salary after realizing he’s in the wrong field and needs to start over somewhere fresh. Or an end-of-career executive might opt to reduce wages for few years and do consulting work before finally retiring.
“A friend of mine in HR says, ‘You should never be running away from something. You should always be running to something,'” Weinlick says. Make sure that the salary cut is benefiting you and your career and is not simply a poorly conceived escape from where you work now.
Rework your financial plan. Opting to take a wage cut will have implications for your overall financial health, says Douglas Boneparth, president of Bone Fide Wealth in New York City and co-author of “The Millennial Money Fix.” “Before you say goodbye to a percentage of your salary or income, it’s worth making the investment to see what the implications will be short-term and long-term by engaging in financial planning,” he says.
That means sitting down with your financial planner, spouse or with a calculator and determining whether this pay cut will impact your retirement goals, your access to health care, dental care and other insurance resources and whether you’ll have to reduce lifestyle expenses, Boneparth says. Can you continue to pay your student loan debt or your mortgage? Will your salary slashing have an outsized impact on future bonuses or other benefits?
Run through these scenarios, Boneparth says, and ask yourself: Does the pay cut make sense? Is it affordable? Would you feel good about doing it? “If you can say yes to each one of those questions, you have earned the right to make the decision,” he says.
A good step is to find one or two people who have made a similar wage-reducing decision and discuss how it went, says Paul McDonald, senior executive director at Robert Half, which staffs workers in the finance, accounting, technology, legal, creative and administrative professions.
Consider future earnings. A pay cut may seem temporary, but the consequences can stick with you for years, even when you’re ready to go back to your previous salary. “You’ve got to do the economic forecast,” McDonald says. “What’s the impact today? Three years from now? Five years from now?”
For example, if you’re negotiating a pay decrease in exchange for more flexibility or remote work privileges, “that might make you look less career-minded,” Weinlick says. “Are you putting future promotions at stake?”
Will slashing your salary put you at a disadvantage the next time you go to negotiate salary with a current or new employer? And are you willing to start with less bargaining power? “A radical change in career path usually means a radical change in economics,” McDonald says. “The larger the change in career path, the larger the change in income.” So think carefully about the future impacts of your decision.
Remember the risk. Keep in mind that you’re taking a sure thing – your current salary – and risking it in exchange for something else: a new industry, a new city, a new job, better work-life balance. Is that risk worth the reward?
If you’re just starting out, or near retirement, shifting careers and compensation levels may carry a low risk. But if you’re midcareer, or have other family members relying on your earning power, consider whether you can stomach the trade-off.
At the very least, do your research before you sacrifice your earning potential for something new.
