The Kindest Cut of All-Increasingly, companies are rolling back salaries rather than laying off workers.

Georgia Gallarde’s paycheck just got 10 percent lighter. But the sales representative for National Airlines knows things could be worse. "I’m really happy to have a job," she says.

Kemba J. Dunham and Kris Maher, http://www.careerjournal.com

That kind of upbeat attitude could be in big demand in coming days. In a further effort to cut costs, companies of all sizes and in a broad range of industries are cutting employee pay.

Stratagem Inc., a Menomonee Falls, Wis., provider of information-technology consulting services, enacted a mandatory minimum salary cut of 6 percent for all of its 225 employees, effective Oct. 1. Some employees were subject to an additional reduction since customer demand for their particular skills was lacking, according to an internal company memo. Pay increases have been suspended for six months.

"We found the actions to be gut-wrenching, but in the best interest of our long-term competitiveness," says Dave Whiteley, Stratagem’s executive vice president.

At public-relations agency Fleishman-Hillard Inc. in St. Louis, about 250 managers, or 10 percent of the staff, saw their pay reduced by a range of 3 percent to 10 percent on Oct. 1. The company, owned by Omnicom Group Inc., a New York marketing and corporate-communications company, also plans to cut about 60 of its 2,300 jobs. A Fleishman-Hillard spokesman says the company is taking the salary-cut situation "a quarter at a time."

For some employers, these pay cuts are the latest effort to rein in costs. Since early 2001, many companies have eliminated bonuses, conducted several rounds of layoffs, and frozen and cut salaries. But with the economy showing few signs of improving, employers in professional services, airlines, telecommunications and elsewhere are once again announcing substantial salary cuts.

Conductus Inc., a Sunnyvale, Calif., maker of superconductor wireless systems, is in its third round of layoffs; for its remaining 66 employees, it cut salaries by 15 percent, effective Oct. 1. National Airlines, Las Vegas, is on its second round of pay cuts.

Some companies are reducing pay as an alternative to slashing jobs. Deloitte Consulting, a unit of Deloitte Touche Tohmatsu, this summer reduced the salaries of most of its employees by an average of 8 percent. "I think salary cuts are a more optimistic approach and demonstrate more of a commitment to your people," says Peter Horowitz, global director of public relations. "It’s not as destructive as watching your colleagues leave."

Still, deciding on the right cost-saving measure "is fairly complicated," says Laura Sejen, practice director for strategic rewards at compensation and human-resources consultant Watson Wyatt Worldwide, in New York. "Employers are under a lot of financial pressure and there are a limited number of [money saving] tools and tactics. The challenge is finding the right balance."

Many companies are likely to reduce 2002 bonuses as well. Rick Beal, a senior compensation consultant at Watson Wyatt, predicts that bonuses will be given out in healthier industries like health care, while they may be eliminated in industries like financial services.

Although most workers would prefer a salary cut to losing a job, it is nevertheless a morale-crusher to suddenly take home less pay. Many employees feel powerless to complain. Given the tight job market, they can’t easily quit in protest.

A consultant at a midsize Chicago technology firm whose salary was cut by 10 percent — or more than $10,000 — this past June, is moonlighting at a second job performing technology services for small companies and individuals in the evenings and on weekends. He earns between $500 and $750 per month from this side gig. "I was and still am frustrated about the pay cut," says the consultant. He adds that he could earn more money moonlighting but is "exhausted."

Inevitably, pay cuts lead to reduced spending by employees, and taken en masse, that contributes to slowing demand for consumer goods. That can result in still more pay and job cuts — and fewer openings for those laid off. "I probably won’t spend as much as I would have," says Ray Christie, 58, chief financial officer of high-tech group Therma-Wave Inc., Fremont, Calif., who received a 12 percent salary cut effective Oct. 1. "My wife and I had been considering buying a new midrange-priced Mercedes. We decided not to do that just yet, if ever," he says.

At Therma-Wave, 11 other senior executives also took cuts of between 10 percent and 12 percent, while salaries for the remaining 440 world-wide employees were frozen.

"Our salaries are such that we aren’t going to go on the street begging for bread," Mr. Christie says. "Personally, I’m a whole lot more concerned about the fact that we have been forced to lay people off than I am about my salary decrease," he says. "It makes it worse to know that the rest of the economy is struggling, so … they’re going to have a difficult time finding a job."

A few companies acknowledge the hardship that salary reductions pose. National Airlines recently announced a second round of cuts, this time affecting all 1,500 employees, who were hit with a 10 percent reduction for four months. The company’s officers — roughly 15 people — were dealt a 20 percent reduction for 38 months. Other managers and pilots had their pay cut 10 percent to 15 percent for 38 months.

In an internal memo dated Aug. 31, National Airlines Chief Executive Michael J. Conway said the pay reductions "are significant," and "I sincerely hope that the number of employees who will be forced to seek other employment will be kept to a minimum."

The company said that concerning employee departures, nothing more than normal attrition has occurred. One danger in enacting pay cuts is that disgruntled employees will leave. But some employers have found those fears unfounded.

Agilent Technologies Inc., a Palo Alto, Calif., high-tech company, cut pay across-the-board in May 2001, and after restoring salaries for many workers in November of last year, again temporarily reduced pay for some in December.

Starting Feb. 1, 2002, the rest of Agilent’s white-collar work force had to take a 5 percent temporary pay cut while U.S. hourly workers were required to take off one day a month without pay. That round of rollbacks ended in August. "Everyone is back on full salary," says Amy Flores, an Agilent spokeswoman.

As far as Ms. Flores knows, staff turnover didn’t increase when salaries were reduced. "My guess is that nobody had anyplace else to go," she suggests. "People figured, ‘At least I have a job.’" Agilent has no plans for additional salary cuts, she adds.

This article is reprinted by permission from CareerJournal.com (c) 2002 Dow Jones & Co. Inc. All rights reserved.

http://www.cfo.com/Article?article=8751