Companies find spreading pain preferable to cutting jobs

Giving workers the boot isn’t the only way businesses are trying to reduce costs these days. Broad-based pay cuts, long frowned upon, are being imposed by a growing number of companies big and small.

It is a risky strategy that experts say can sow discord in the workplace. But some employers say they prefer cost-cutting that preserves as many jobs as possible, even if it means more workers will be affected.

FedEx Corp. cut wages for 36,000 salaried workers by 5% last month; at construction equipment maker Caterpillar, many employees will see their pay reduced by as much as 15%. Gymboree Corp., the San Francisco-based children’s clothing retailer, is cutting senior executives’ salaries by up to 15% and the pay of some other staffers by as much as 10%.

Union workers at YRC Worldwide Inc., the nation’s biggest trucking company, voted last week to accept an across-the-board 10% pay cut to help their employer weather the slump in freight traffic.


At the Newport Beach office of MBH Architects, salaries for partners and many professional staff were slashed 25% to 50% as clients canceled projects and billings fell off a cliff.

The trend is also hitting workers at nonprofit organizations and in state and local governments, and experts say it is a sign that some employers are resorting to exceptional measures to deal with the crumbling economy.

“Companies would rather cut jobs than cut pay,” said John Challenger, chief executive of consulting firm Challenger, Gray & Christmas. “If a company is cutting wages, that’s a sure sign of recession.”

For most employers, layoffs and other cost-cutting tactics are still the preferred way to survive a downturn. The government reported last week that U.S. companies slashed 524,000 jobs in December as the current recession, already the longest since the 1981-82 slump, entered its second year.

Almost 47% of the companies surveyed by Challenger late last year said they had laid off workers to deal with the downturn; only hiring freezes and cuts in travel expenses were strategies cited by more companies.

Workers are being asked to make other sacrifices as well. A raft of companies are eliminating bonuses, freezing salaries and pension plans, and stopping matching payments to 401(k) retirement plans. Some are mandating unpaid furloughs.

Financial publisher Dow Jones & Co., for example, is freezing the wages of about 4,000 employees for one year. The Big Three automakers in Detroit extended holiday furloughs by several days over Christmas and New Year’s, and many companies are imposing four-day workweeks, reducing overtime or forcing workers to take vacation time.

Gannett Co., which owns 85 daily newspapers in the United States, this week ordered most of its nonunion workers to take one week of unpaid leave during the first quarter. Union workers, who comprise about 12% of Gannett’s 31,000 U.S. employees, will be asked to do the same.


Companies that do plan to give raises this year expect to be miserly. In a survey of 620 big employers last month, compensation consultants Hewitt Associates found that half planned to make “significant changes” in payroll spending in 2009, with average raises expected to drop below 3%.

Compared to how employers reacted to the downturn in 2001, “this is a much more severe reaction by companies,” said Ken Abosch, head of Hewitt’s compensation practice.

Abosch said wage cuts have “always been kind of taboo” among employers. The reasons range from financial -- cutting wages doesn’t get rid of the cost of payroll taxes and employee benefits -- to morale concerns.

When a worker is laid off, “the guy is gone; he may be unhappy, but he’s not unhappy in your workplace,” said Dan Mitchell, professor of management and public policy at UCLA. “Whereas, if you spread the pain around, you have a lot of people who are demoralized.”


One factor that may be driving some companies to favor salary cuts is the knowledge that past staff reductions have left employers short of qualified workers when the economy eventually turned around, Challenger said.

“Maybe more companies have seen the damage caused by massive layoffs and they’re trying to hold on to more people,” he said.

In a video message to workers posted on FedEx’s website, Chief Executive Frederick W. Smith said the salary reductions and other cost-cutting actions were taken “to minimize job loss and to protect our long-term financial strength.” However, Smith, who will see his $1.4-million salary reduced by 20%, also described the current steep downturn as “uncharted territory,” and said he couldn’t predict how events would unfold.

Posts on Smith’s blog below his video message by people identifying themselves as FedEx workers capture the disparate reactions wage cuts can bring forth.


“In this terrible economy in which we are all living, I am just thankful to have my job here at FedEx Ground,” wrote one.

But another poster opined that “cutting our pay is not the solution. Streamlining, reviewing processes, evaluating (and eliminating) personnel, cutting routes, eliminating advertising and marketing costs are only a few of the ways to save money. This is only the beginning. No doubt, the quality people inside FedEx will rise and help us all through these tough times . . . even if the slackers are riding our coattails.”

Gymboree, which is facing a downturn in retail spending, said it couldn’t rule out future layoffs. Still, “the majority of the feedback” from employees about the salary cuts has been positive, said Marina Armstrong, the company’s head of human resources.

“Of course, we are not naive enough to believe that people are not disappointed or that these cuts are not causing hardships in the lives of some of our employees,” she said. “But we believe that the salary cuts were the best action for the company to take to be prepared for these tough times and to protect as many jobs as possible.”


Greg Simonoff, an architect with MBH in Newport Beach, said his 25% salary cut came on top of lost bonuses and profit-sharing; all told, his income has been reduced by 40%.

He considers himself lucky because his wife works but acknowledges that the lost dollars have forced the family to forgo vacations and perhaps rethink college options for their high-school-aged son. Plans to take all three children to North Carolina to attend a family wedding were shelved to save money.

“No one accepts it with big smiles,” Simonoff said. “But they do understand it, and they know that if we didn’t do these things, there would be more layoffs.”