When Pay Cuts Look Just Fine

Marcus Barnes was enjoying a trip to California to celebrate a friend’s wedding earlier this month when he checked the e-mail at his Little Rock, Ark., office. One message could have ruined anyone’s vacation: His company was cutting almost everyone’s pay by 5%.

But the news didn’t bust his groove. In fact, Barnes, a product analyst at Acxiom Corp., and his wife, Rizza, who also works there as a marketing communications associate, were relieved and grateful.

“We were very glad. We thought things could have been worse,” said Barnes, 27, who had been hired only two months earlier. “We were glad we still had jobs because it’s a very good company.”

Job security worries are running so high that when bosses and bean counters demand almost any other form of corporate sacrifice--even pay cuts--they can actually score points with the rank and file.

More than 406,000 announced job cuts in the first quarter might make layoffs look like corporate America’s job one. But the fact is that many companies are taking pains to avoid putting people out of work. Corporate motives include fear of hurting morale and some measure of altruism. But more significant is the widespread belief that many of the layoffs of the early 1990s were just bad for business.

“The last time we had a layoff was 1991, and within a year we had an aggressive hiring program going again. So we looked kind of stupid,” said Acxiom Chairman and Chief Executive Charles Morgan, who sought to avoid layoffs at the information technology company employing more than 5,400 people.

So companies are finding other ways to save money. Those include slashing perks, both lavish and incidental, that were fueled by the economic boom and efforts to keep up with the dot-coms. Now, the ax is falling on everything from first-class travel to free sodas. Extravagant galas and awards banquets are giving way to ice cream socials and pizza parties in corporate cafeterias. Companies are introducing four-day workweeks, and furloughs are making a comeback.

Last week, Sun Microsystems Inc. said it would send most workers home for a week in July. That followed a series of other actions by the Palo Alto server-computer maker that included reducing performance-based compensation for workers, travel costs, expansions and discretionary spending.

Several corporate executives said they see layoffs as a last resort because this slowdown, unlike the recession of the early 1990s, is playing out amid a tight labor market caused by the shrinking work force. As members of the gargantuan baby boom generation begin to retire, the number of workers ready to take their place will decline through 2010, according to government projections.

“The economy will recover. The talent shortage will not,” said Richard Wellins, a senior vice president of Development Dimensions International, a Pittsburgh-based human resources consulting firm.

“Some [companies] expect 20% to 50% of leadership talent to retire in the next five to eight years,” he said. “Therefore, one negative consequence of wholesale layoffs is that they will not be able to replace that talent when they need it.”

Many companies still haven’t recovered technical, professional and leadership talent lost during layoffs they imposed in the 1990s, which hampered them when the economy turned around.

“The last time, layoffs tended to end up losing more good people than bad people,” Wellins said. “I think companies are a lot wiser today.”

Studies support that view.

Only half of the downsizings during the 1990s led to increased profits, according to an examination of eight large companies by researchers at Indiana University’s Kelley School of Business. They found that broad layoffs were least effective in achieving financial goals. Adverse consequences included a drop in quality, loss of expertise, reduced productivity and the need to hire consultants or rehire displaced workers.

Of more than 500 companies that downsized in the early 1990s, more than half failed to meet profitability and productivity goals, and only six in 10 reduced expenses, according to a 1993 study by Watson Wyatt Worldwide, a Washington-based human resources consulting firm.

“The research didn’t get into exactly why, but you could presume that cutting your way to financial success doesn’t necessarily work because you are not increasing productivity, and you haven’t increased demand,” said Tom Porath, a managing consultant of Watson Wyatt’s Southern California practice.

“All you’ve done is decrease your work force, and when demand does turn around, you’re not in a position to take advantage of it quickly.”

At Management Recruiters International, a Cleveland-based staffing firm, executives have taken several measures to avoid layoffs among its 5,000 employees, including cutting by two-thirds the number of people sent to an annual convention in Puerto Rico and delaying the opening of three offices.

“Our main emphasis is to avoid layoffs at any cost,” said Chief Executive Allen Salikof. “We think about that in every decision we make.”

Elsewhere, training budgets are popular targets for cuts, said J. Richard, a compensation consultant based in Half Moon Bay who is familiar with cost-cutting measures his Silicon Valley clients are taking. “That’s an easy cut for companies to swallow, and it’s a fairly big budget item. That usually goes quickly in a downturn.”

Some companies are willing to carry people in the short term and retrain them in hopes of emerging stronger when the economy turns around, said Dudley Brown, managing director of BridgeGate, an Irvine-based executive search firm.

“There’s a lot of companies that haven’t laid people off, that have reassigned people to work in other parts of the company to learn a new product line,” he said. “In the short term, maybe it wasn’t very financially astute of the employer. But in the long run, they maintained this group of loyal employees.”

Other Cost-Cut Measures Can Bite Back Too

Layoffs aren’t the only cost-cutting measures of the 1990s that have come back to haunt corporate leaders.

Regrets over the introduction of health maintenance organizations could make employers cautious about altering core benefits during this downturn, said Raylana Anderson, an employee benefits consultant in Peoria, Ill., and a member of the Society of Human Resources Management’s compensation and benefits committee.

“We were getting double-digit health plan cost increases, and HMOs came riding along and crested that wave big time. Now they are everybody’s biggest, baddest villain,” she said. “Now employers are remembering how we took the white horse last time, and are saying maybe we should stick with what we’ve got.”

Anderson said surveys show that health benefits are very important to employees, in some cases more important than pay raises. Employers aware of those sentiments are cutting trendier perks instead.

Health “benefits are going to be the ones people pay attention to,” she said. “No one remembers if they had pet insurance taken away.”

Even when cost-cutting goals require layoffs, some companies are taking novel approaches to minimizing them and preparing the work force.

At 415 Inc., a San Francisco Web design firm, 72 employees met in a series of brainstorming sessions and made cost-saving suggestions, such as four-day workweeks and monthlong unpaid leaves.

Managers circulated the ideas in a 20-question “Survey of Lesser Evils.” Many of them were implemented, enabling the company to hold layoffs to 16, sparing as many as 10 people’s jobs, Managing Director Barbara Pagano said. She added that the process itself was valuable.

“Even the people laid off understood better why it had to happen, and all the management decisions we were facing,” she said. “And there was less resentment.”

The Next-to-Last Resort: Cutting Into Salaries

Pay cuts, such as those imposed at Acxiom earlier this month, are the most dramatic cuts a company can make short of layoffs. Chief Executive Morgan had cut some travel and other expenses late last year.

But after the company issued an earnings warning in March, he huddled with other executives to consider more serious measures, including layoffs.

The brainstorming session led to the idea to shave the salaries of 5,100 employees earning more than $25,000 by 5%. Employees received Acxiom stock options in exchange.

Acxiom’s companywide e-mail also announced that employees could take additional pay cuts up to a total of 20% of salaries in exchange for more options.

Morgan took the full hit, as might be expected of a chief executive seeking to set an example. He said he would have been happy if 10% or 20% of the eligible work force took anything more than the mandatory minimum cut. But the optional pay cut was more popular than expected, drawing more than 1,800 employees, or 40% of those eligible.

Morgan, who last week reviewed the first payroll run under the austerity plan, said the employees’ sacrifice will enable Acxiom to save $24 million this year.

In addition, with so many employees taking company stock options that vest 12 months from now, retention shouldn’t be a problem for a while, Morgan said. “It’s clear that they all plan to be here more than a year.”

Marcus and Rizza Barnes decided to keep her cut at 5% but opted to increase his to 14%.

That means they won’t be able to replace his 1989 Dodge Raider or her 1990 Nissan Maxima any time soon, as he had hoped.

But Barnes said it did allow him to realize another goal: investing.

Barnes said he hopes the couple’s short-term sacrifice will pay off in two or three years when they want to start a family. In the meantime, he said, they are tightening their belts.

“We don’t go out to eat as much,” he said. “We stay around the house and do yardwork.”