Struggling with a Non-Performing Employee: Is Pay Cut or Termination the Right Move?

There is a performance issue with an employee. His performance is not satisfactory. He has been informed and warned several times; however, the results are not improving. The company feels the employee is not worth his CTC, so the options are either to pay less or terminate his employment. What is the better practice in this case? Please advise, it's urgent.

This is a very common issue that organizations face nowadays. There is a way out. Doing things verbally will not suffice for your issue.

Introducing a Performance Improvement Plan (PIP)

You can introduce a PIP (Performance Improvement Plan) in your organization. The process will be as follows:

This can be a 3-month plan. As soon as you get to know that there is a case of non-performance, you can put him/her on a PIP.

1. On the first day, give a formal letter of non-performance with the points noticed of non-performance and ask for improvement within the next 2 months. In that letter, please mention that if performance is not improved, then at the end of the 3rd month, he will be fired.

2. Ask the immediate manager to thoroughly notice his performance.

3. At the end of the 2nd month, let's meet - employee, immediate manager, and HR and jointly discuss the performance. If performance is improved, then give a letter to improve a bit more and close the case, but if not improved, then give another letter mentioning that if it is not improved within the next month, then he will be terminated.

4. At the end of the 3rd month, if the performance remains the same, then terminate.

Regards,

Thank you, Nipuna. We have taken the above steps for the last six months, but there has been no improvement. Management believes that the employee could be worth a lower CTC, as paying the current amount is just an extra cost for the company. Should we offer a proposal of a lower CTC to the employee? Is this a good practice?

Considerations When Demoting an Employee with Reduced CTC

When you demote somebody with a reduced CTC, please expect the following:

• Low morale and motivation
• Lack of interest in goals or shared goals
• Initiating a job search elsewhere

Why should the company pay for someone just to be on the payroll while they are job searching at the company's expense? If the performance is not up to expectations and efforts to improve it have been made, provide a notice period of one month and find a replacement within that period.

Introducing a salary cut for a non-performing employee has shown results in my organization. There should be a clause to repay him/her the deducted amount and revert to the same CTC. I have found that it worked well with 60% of the employees, who became good performers, but backfired with 40% of employees who resigned. Only a few came back and joined for a lower CTC.

The concept should be explained politely to the employees, telling them, "You are very important to us, but your performance must improve to the mandated level." Otherwise, some employees may have a values conflict and exit the organization, leading to potential confrontation.

Employees must understand the performance norms required to maintain their salary. Legally, the company has the right to reduce salaries. However, it's important to acknowledge that not all strategies will be effective for everyone. If a salary cut is introduced, it must be applied to all employees to avoid further negativity.

People join leaders but leave bosses when they quit, not the company. A proper review mechanism should be in place to analyze and support employees in performing better. Reviews should not be criticism sessions; instead, reviewers should provide value, guidance, and understanding to help employees overcome performance issues. Employees may face financial or personal problems affecting their performance, requiring a compassionate approach. Supporting struggling employees, coaching, mentoring, and empowerment can be effective. However, for some, only the threat of a salary cut may be understood, which should be a last resort. If performance falls below 30 to 40 percent of the expected level, termination may be the better option. Those performing at 60% or above may benefit from salary restructuring. Proper documentation of performance improvement discussions is crucial for seriousness and legal purposes.

Regards