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In a recent peer review I was asked if I was willing to allow company to “retain part of my salary.” The exact percentage was not revealed. They used the word “retain” although they pressed that this is not related to my performance.

Some context about the company: It is a start up and I have joined as software engineer 9 months ago. Company has two sources of income, “Product A” (which I am part of) and a bunch of services provided in education sector, not too unrelated to the main product.

I was told that this is going to be the case for at least until December of 2019 owing to poor performance of the product in market.

The company’s recent funding round was not successful and I’m starting to worry that if I do not agree I will probably be let go soon.

What details should I consider before agreeing for part of my salary to be “retained” by employer?

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    Have you considered that if the company is terminated you may lose the "retained" money? – P. Hopkinson Jul 16 at 9:15
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    @P.Hopkinson Yes that indeed is a concern. After reading the answers here it appears that best case scenario for me is if I manage to get some short of written guaranty that all my dues will be paid if I were to let go or I resign. If I manage to land another job in 3-4 months there is a good change I'll get away unscathed. Company does have another source of income which I am hoping will keep company afloat for few months. – Ankit Jul 16 at 18:58
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    "get some short of written guaranty that all my dues will be paid if I were to let go or I resign" I think P.Hopkinson is actually more concerned about what happens if the company goes under, you may never see that money if the company is bankrupt – Bee Jul 17 at 15:49
  • @Bee I understand what P. Hopkinson is saying but this is the first hint I've got really and it appears that I am kind of being thrown under the bus. If I manage to get another job sooner and company is still functional I can still have something that will favour me in labour commission if it comes to that. I'm still figuring out what is my best option. – Ankit Jul 17 at 16:54
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    What is the company offering in return? Preferred shares that cannot be diluted? Cash bonuses to return the money after profitability? Something else? Nothing? What happens if employment is severed by either party and the company owes you money? (I think you need a written agreement; a contract that covers enough cases it cannot be reasonably frustrated). – jww Jul 18 at 18:53

13 Answers 13

218

Ignoring the fancy language, the company is essentially asking you to take a cut in pay. This is not uncommon, especially when companies are not doing well.

From your description, it sounds like you are worried that if you don't agree to the pay cut, you'll be let go. If you want to keep your job, or you think you'll have difficulty finding another job with a different company, then it makes little difference what "details" you can arrange with your employer. Your only option is to accept the situation with grace and goodwill.

If it was me, personally, I'd be asking the following questions:

  1. Will the pay cut be reversed if the product does well? Can I get a guarantee in writing?

  2. Are all the employees being asked to take a pay cut? In particular, are the executives also forgoing part of their salaries, as well as any other performance-based compensation?

  3. What happens after December 2019? If sales don't improve, does the company expect to have to lay off employees anyway? If sales do improve, will I get all of the "retained" money back?

  4. Will the reduction in salary actually reduce costs to the point where the company can stay afloat? Or are the executives simply buying time while they work out a way to save themselves, at everyone else's expense?

Naturally you may have to ask these using more diplomatic language, and there is no guarantee that you will get a straight answer to any. But you may get the sense whether your manager or those higher up are lying to you.

To be honest, it sounds like this is going to seriously impact your job satisfaction, not only by reducing your compensation, but by hurting employee morale. Unless you have some personal attachment to the success of this company, it's a good sign that you should brush off your resume, and start looking elsewhere.

(Edit) Keep in mind that there is rarely any value in a verbal or even a written assurance from the company. Even if the product does sell, the specified conditions can be circumvented by clever accountants -- and even if they don't, you have to A) have the financial means to take them to court, B) have the time and money to see the case through should it be prolonged, and C) expect that the money you recover will be sufficient recompense for your time and legal costs.

Lots of people talk about "taking someone to court" to recover money they feel they're owed, but I think very few who actually do find that the end result was worth it. If you're already dealing with a company in financial distress, why would you expect any promise to repay will hold value?

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    Good answer. +1. However, speaking from the local experience, there's no way for the OP to reliably know if the other employees and executives too are taking the pay cut. Also, no reliable data can be obtained for point #4. – Nimesh Neema Jul 16 at 7:26
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    Great answer - I'd just add a fifth point: In case the company performs well after December 19 - will the total of the cuts be refunded via an overpayment of amount X over a period of Y months. I believe that´s a legit question to ask since OP has been regulary employed and both sides agreed on a certain paycheck.. – iLuvLogix Jul 16 at 8:49
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    "Or are the executives simply buying time while they work out a way to save themselves, at everyone else's expense?" In my experience, this is very likely. All are equal, but some are more equal... – Niko1978 Jul 16 at 9:56
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    I would totally throw confidentiality out the window, and ask coworkers whether they have been asked the same question. You should be looking for another job immediately no matter what, because this isn't likely to keep the company from going bankrupt. But if others aren't being asked at the same time, you'll be the first one cut, and you should be right out the door. – George M Jul 16 at 17:49
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    @Myles honestly, unless you run it by a lawyer, any guarantee might be useless. I would ask the question just to see how they'll answer, not because I honestly expect it to be worth anything. – Andrew Jul 16 at 21:32
121

This is the mother of all red flags. Look for another job immediately. Don’t cover any expenses for the company (because they might never get paid).

You are afraid that you lose your job if you don’t agree - but they want you to work without pay. You can agree to this if you can’t find a new job and only until you find something new, if it is made 100% clear that you are still owed the money, even after leaving the company, and it is just a delayed payment, and if there is a tangible benefit for you. They have to offer you something that puts you into a financially better position if the company succeeds. After all, you are giving them a loan when others refused.

17

I was told that this is going to be the case for at least till December of 2019 owing to poor performance of the product in market.

You need to pose certain questions to the management:

  1. What happens if unfortunately, the situation doesn't change by December 2019? What if it gets worse?

  2. What about the potential opportunity lost where you could have invested the money and end up earning in excess to what you will get actually paid? Has the company provisioned for this?

  3. If the company indeed makes a profit by using means by withholding salary, what kind of share/benefit you'll get as an employee?

The company's recent funding round was not successful and I am starting get worried that if I do not agree I will probably be relieved soon.

You should keep looking for a new/better opportunities. No sane company does business on the expense of employees basic pay or salary. It would be a different story if you are made a partner in profit or given options.

Remember you just an employee, working for earning a living with the company, and not a stakeholder in the business (assuming that's the case since you didn't mention anything along those lines).

  • Thanks for pointing that out, I'll try to get as much clarity as I can before I send my response to them. – Ankit Jul 16 at 11:35
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    And if they offer you a stake in the company in order to keep you, be sure it's not a stake that will be making you liable for some of their losses when they go bankrupt! You would absolutely need legal advice here – George M Jul 16 at 17:54
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The ways you potentially can lose the "retained" money:

  • Bankruptcy: there's pretty much no way to protect against this
  • Termination: do you get the money if they fire you?
  • Resigning: do you get the money if you resign?
  • "Eventual" (i.e. never) repayment: there really should be a fixed end date, not "'at least' until"
  • Interest: if they keep the money for a year, you've essentially lost any interest you could've gained by investing it instead.
  • Some legal loophole: only a lawyer would be able to tell whether there might be one

You could counteract the loss of interest, as well as the other risks, by requesting they add interest in the agreement. The exact amount would depend heavily on how risky you deem the overall agreement. This will also motivate them to repay you faster. Although it's likely they will simply decline this.

Most of the above should be spelled out in a signed written agreement.

But overall I'd say assume you're not getting that money back. As you correctly point out, they might choose to get rid of you if you don't agree. So, whether you agree or not, it's probably a good idea to start looking for another job.

As an alternative, you could consider asking for stock options. This is a common way for start-ups to "pay" employees more money than their actually able to pay. This is similar to asking for interest, but it is even higher risk. Although it does give the possibility of winning big on the (extremely unlikely, especially given the circumstances) possibility that the company becomes highly profitable. I'd strongly recommend talking to a lawyer if you want to go with this option though, because shares are complicated and there may be plenty of ways you can end up on getting cut out of the profit.

Money doesn't fall out of the sky. Why are things bad now and what will they do to make sure things won't get worse in future? If they can't give you a convincing answer to that question (with data to back it up), you shouldn't have much hope of ever getting any money back and you should take appropriate action (i.e. look for another job).

  • When I asked about if they have any contingency plan they said they are looking at 'convertible debt' option. I do not fully understand how effective that is or even of they'll be able to find a lender. – Ankit Jul 16 at 19:05
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    @Ankit Convertible debt is, as far as I can tell, loans that can be converted to shares. That would help with short-term financial problems, but there'd need to be a plan to increase income in the long-term. Otherwise they'd just have debt on top of not having money. – Dukeling Jul 16 at 19:48
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    @Ankit The thing is, if they could do this reasonably, they wouldn't really have to ask you for a pay cut (even a temporary one). The main thing you have to do is a calculation of your own - do you think it's worth sticking with the company, even if you assume the "cut" is never going to be repaid? – Luaan Jul 17 at 8:05
  • @Luaan Getting investors or lenders can take time. It's plausible for it to only happen after a few months (and for them to not have enough money to pay full salaries until then). Although, as mentioned above, it wouldn't mean much without a good business plan (which they'd probably also need to actually get an investor). – Dukeling Jul 17 at 8:28
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Something else you might consider negotiating about: can you cut back your hours by however much your pay is being cut? Then there won't be any awkward dispute down the line about whether the company is finally doing well enough to start paying you back the considerable funds they'd owe you by then. And then also it'd ensure that while not instantly destitute, you would get a significant amount of time for job-hunting/interviewing etc. Which you will need no matter what because this is a house-on-fire situation..

  • There are no hard limits on working hours as it is a start up, although general guideline is for 8 hour a day on average. From where I come from(India) Although it sounds logical proposing less working hours because less salary is paid creates all kinds of disputes unless such contract is part of initial negotiation. – Ankit Jul 17 at 5:03
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    But @Ankit, your contract is basically moot if they're proposing to not pay you. You are re-negotiating from scratch here.. – George M Jul 19 at 0:16
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Them expecting you to take a pay-cut until (at least) the end of the year is massive red flag.

Maybe they are validly losing their shirt (i.e. business wasn't as good as it seemed).

Or, other awful scenarios...

  1. Someone is trying to legally cook the books to make the company look more profitable then it is (e.g. to sucker new investors to invest, to sucker someone to buy them out, etc). Essentially, cut labor costs to make company seem profitable in order to sucker others into the whole mess.

  2. They're testing the waters with employees to see if they can find any employees that are willing to keep getting abuse. That is, they ask everyone to take pay-cuts - and find the folks that accept it, and that's just the start of a slippery slope where they expect you to eat more and more crap as they use and abuse you. This is just psychological "testing" to see if they can find employees that have no self-esteem and/ or are desperate for work. Sticking it out in those situations just proves to them you're willing to get kicked around. Often you know you're in that situation when they cut your pay, then start treating you like complete garbage (making unreasonable demands, telling you to do more work, etc). Companies that are validly making pay-cuts when they don't want to will be walking on egg shells around the employees they did it to, not treating them like crap. But, you only find out which way it's gonna go after you take the pay cut.

It's hard to tell if there's ulterior motives, but it's definitely a huge red flag.

Polish off the resume, start networking, and jump ship as soon as you can. Because, if this is a company-wide pay-cut.. others will be doing that. And, then you get stuck with both a pay-cut and having to do extra work from employees jumping ship.

And, if you're the type of person that eats that shit sandwich (pay-cut + taking on extra work), they just assume you have no job prospects and will start treating you like crap anyways, because they won't respect you.

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If you seriously believe the company has a future, then you can consider asking for a compensation in the form equity (aka "sweat equity"). This also help showing your belief in the company, and your "investment".

  • and at a multiplier 5x the forgone salary as shares for example – Neuromancer Jul 20 at 22:02
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I have worked to improve over 400 companies that are failing like yours. You must ask that the retained money be put into a trust account that will be turned over to you as soon as the company fails (it will fail). When they don't agree to that you know the executives are paying themselves full salary times two using your retained money as they go bankrupt.

So either accept that this is now lower wage job or quit immediately. If they won't put it into a trust then it is money gone forever.

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    But the "retained money" obviously doesn't exist. If it did, they could pay you with it, couldn't they? – TonyK Jul 17 at 15:07
  • 'It will fail' - how can you be so sure? – Cloud Jul 18 at 10:53
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    This makes no sense. If the company can afford to set the money completely aside in a trust account where it can serve no purpose except paying the employees the money they owe, what's the point of the trust account? The company could just pay the money as wages, as usual. – David Richerby Jul 18 at 21:39
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    If the company fails, the trust account will fall to the courts to distribute among the debtors. That means government first, banks second, venture capitalists et. al. third, and employees a very distance fourth. There will simply be nothing left. – jwenting Jul 19 at 10:12
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    Even from the point of view of the company this makes no sense. They would prefer to allocate available funds in the most effective way, which in this case is in your pocket. No funds, no trust fund. Answer is just nonsense. – user207421 Jul 19 at 10:41
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Run.

I've been in that situation twice (once (in the USA) where an offer was made to "keep working for a fraction of your salary, and we'll pay you later" and once (in Europe) where they just didn't pay anyone salary at the end of the month and made promises 'the company will be sold, the new owners will backpay').

In both cases, I quit. Rightly so, because in either case, the companies ceased to exist within a few months. Co-workers who did not quit never retrieved their salary.

If a company can no longer pay its staff, its future is looking very grim.


To clarify, I didn't just hand in my resignation (which limits your rights). In the first case, the alternative of not accepting their offer was termination; in the second case, I wrangled out a good deal (for me) with HR.

  • There is another way. Don't quit. Redirect your effort to finding a new job. Accept your reduced wages while you are looking for a more appropriate opportunity. In the unlikely event the company can turn things around before you have landed somewhere else, then redirect back. If you get fired before landing somewhere else, then every reduced paycheck collected is more than the nothing you would otherwise have received. – emory Jul 18 at 22:34
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So they want you to accept a pay cut, but they don't say how much, nor for how long,or whether you'll ever get your money back, and keep your job. I'm unfamiliar with Indian labour law, and how easy it is to lay off somebody. But it is of the essence that you leave this job ASAP, and find something with more stability, even if it's not quite as exciting, or it pays a little less. From there, you can start planning your career again. In the meantime, try to delay as much as possible, until you either have to accept or lose your job.

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They're giving you a paycut. I'd probably leave. At the very least I would not accept it without alternative compensation. Ask what they want to reduce it to, and ask for stock in exchange at the most recent valuation. To be vested at the rate your salary would accrue. If they say no, its time to walk.

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I'd like to offer you a different perspective here, because there is great opportunity here if you're smart about it.

For easy math, I'm going to say that you're paid 5k a month, and they're wanting to retain 2k a month. What you are doing is, quite literally, loaning this company 2k a month until they pay you back.

This means you're no longer just an employee - you're an investor! You should be treated as such! So, ask yourself, do you really think this company has a chance to make it? If you weren't an employee, would you consider investing a substantial amount of money in it? If you would, and you truly think it has a high chance of success, then you should consider doing the deal - but you have to make sure that money you loan them is making you money in return. It could be stock, it could be interest, it could be extra vacation, there's lots of things it could manifest as.

Something that strikes me is the fact they're telling you upfront about the retaining of the money. They could just... not tell you and start withholding some in a few weeks or months. So the fact that they're upfront about what's going on is good news.

Now, it could be investing isn't for you. And it could very well be this is a bad investment. You should consider your options carefully, and remember one of those options is to run away like you're following a bomb technician in a full out sprint. Just make sure you keep your options on the table because if you can extract value you probaly should.

-1

You did not ask the most important question (yet, you should now), which most of the answers just assume one way or the other:

"Is the company unable or unwilling to pay your full salary?"

If they are unwilling, you can begin a discussion about your performance, or the performance of the product. The former is a serious discussion; the latter is not, because unless you are the responsible product manager with control over the marketing and R&D budget, the performance of the product is not your responsibility.

If the company is unhappy with your performance and believes that you are not worth the salary they negotiated, you can accept or push back. Pushing back is very simple: You refuse to have your salary cut. You remind them that negotiations are part of business and if they think they negotiated badly, they are free to cancel the deal entirely (fire you) or offer to change the deal (cut your salary), but only one of these options does not require your agreement. And why, exactly, would you negotiate well and then undo it all?

If the company is unable to pay, it is bankrupt. Not in the future, not potentially, not maybe. The definition of bankruptcy is the inability to pay your due bills.

In that case, I can only support every other answer that recommended to leave. Collect whatever they might still owe you (travel expenses or such things) immediately and be out the door before the whole thing collapses.


There is also an important personal decision you have to make: Will you ever accept a cut in your salary? It helps to have principles. One of mine is that I will never do the same work for less money, and the offer itself is enough for me to quit. I was in that situation and I could almost certainly have successfully fought the attempt (had connections). I didn't. I asked for time to think, then never mentioned it again, found a new job and made sure to inform the top boss (who was very sorry to lose me) about the exact reason I left and the person responsible for it. Fun fact: That person doesn't work there anymore. :-)

(Footnote: For an actual pay cut, the answers saying that you could ask for fewer hours would be on point, but by calling it "retaining", they've cut off that option for you, possibly intentionally.)

  • I did asked them whether this has to do with my performance? Their rough answer was "No, the product has not performed up to our expectations, the sells are down by 25-50 percent". But I am also not completely eliminating their 'unwillingness' as company's other source of income (the parallel services) is 'up to expectations' according to them. I have started series of communication to clarify lot of details but in any case I am looking for another job immediately. – Ankit Jul 19 at 5:34
  • @Ankit in such case they're trying to move the business risk from the owners and shareholders to the employees, which is simply dishonest. – Tom Jul 19 at 8:00

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