You Need a Salary Cap, Just Like the NFL

At this writing, I am not clear on the details of the Coronavirus Aid, Relief, and Economic Security Act. It should ease the burden on the entrepreneur, the business, and the individual team members. Contact your lawyer or CPA for details on how it will benefit you, your employees, and your business.

Entrepreneurs and small business owners must reduce expenses. They have moved from thinking, This will be my best year ever, to, Will my business survive 2020?It’s a whiplash. 

But it is a whiplash for everyone. Entrepreneurs the world over are dealing with the same market problem at the same time. Our buyers are confused, and confused buyers say, “No.” 

The result of this whiplash is to cut expenses and to cut them fast. The biggest expense item is payroll. Cut people. The hardest thing you’ll ever do in business.

It took a long time to build a great team—people who believe in you and your business. What took years to build can be destroyed in one five-minute meeting. Just say the words, “I am sorry, but I need to let you go.”

The objective is to keep your team together and get through this.

I see a less conventional approach—an approach aimed at preserving your team and your business, and in the end, you will come out of this economic uncertainty more substantial. To accomplish this, the entrepreneur leader needs to catch up and embrace the thinking of his key team members. It is time to change the way you, the leader of the business, think.

How employees think.

They know there will be layoffs. They know your business as well as you do. They have eyes and ears. The salespeople are not making sales. The product is not being installed. Customer training has stopped. Accounts receivable can’t collect.

They are talking to their family and friends. They realize the same things are happening in other businesses. Everyone they know is on edge and concerned for their livelihood. They’ve concluded, We are in this together. 

And they are all thinking, If I get laid off, where will I find work? There is nowhere to go.

They will go to the unemployment office and seek relief, but then they will go home. They’ll try to look for a job, but there will be no one hiring in their industry over the next few months. So they will sit and do nothing. They will fret. They will be unproductive as they are without work, the very thing they want to do. They want to work.

You, the employer, must think like your team is thinking.

When you think layoffs, you automatically think about the market conditions that caused the layoffs. If you’ve been in business for long, you’ve experienced recessions. Layoffs usually occur in business when your expenses get ahead of your revenue. This is caused by a demand-driven recession. 

We are in a supply-driven recession. 

We all want to go for a night out. Eat at our favorite restaurant and then watch our favorite artist perform in concert. There just aren’t any restaurants or concerts out there right now. 

Every business in the world, including all your competitors, is suffering the same fate as you. Their buyers, like your buyers, are not buying. So everyone is doing layoffs. And not just everyone in your industry. Everyone in almost every industry.

With this in mind, I propose an alternative. I call it the salary cap. Let’s take a page from the NFL playbook.

Set the salary cap. 

Dig into your business financials. Determine how much cash you have and how long you think this supply-side recession will impact you. You have to make an assumption. I know you don’t have useful data. Regardless, you must make an assumption. The higher your salary cap, the faster you will burn cash and the greater the risk. 

Now comes the negotiations. Sit down with your leadership team and review your assumptions, the risk you are willing to take, and the resulting salary cap. Modify it as you get input from the team. Agree on the plan. Start negotiating salaries to keep the team together. 

I suggest you take these three steps.

1. Take care of your team by taking less yourself.

The most significant sacrifice has to start at the top. If you want options to keep the key team members in place, you can’t expect them to do what you are not willing to do yourself. Lead by example. You show me how much you care about me when I see the pain you will endure to keep me around.

2. Offer the key team member less pay. 

This might be on the order of 50-70% less pay. Whatever the number needs to be to stay under the salary cap you all agreed to. Offer the pay you can afford to pay. This has nothing to do with what the person is worth. These are unprecedented times. We are all in this together. It is then up to the key team member to decide to go or stay. Everybody’s circumstances are different. You don’t know until you ask.

3. When you run out of salary cap, offer the team member no pay but continued work.

These circumstances are so unique that people, your people, may work for nothing. This isn’t a long-term solution, but it may be a good short-term solution. None of us know how long this economic mess the virus created will last. But we do know we are in this mess together, cross-industry and globally. 

We also don’t know what happens when it ends. How long will it take for your business to come back to normal? How long will it take to find new employees with the same belief and commitment to the business? How long will it take to develop them into contributors?

If I am the key team member, how long will it take me to find a new job at a new company? Will I enjoy it as much as my current position?

Final thought.

These are unprecedented times for all of us in business. It doesn’t matter if you are an employer or employee. It is unnerving because none of us know what is going to happen. Maybe, just maybe, we should trust each other, sacrifice together, and ride it out…together.

Better times are ahead! But only if you can keep the team together.