Dec. 18 (Bloomberg) -- FedEx Corp. cut Chief Executive Officer Fred Smith’s pay by 20 percent and will trim smaller amounts from U.S. salaried employees as the package shipper struggles with the longest recession in a quarter century.

About 12 percent of the workforce will be affected by the pay reductions, which will be 5 percent for U.S. salaried employees and as much as 10 percent for senior executives. Hiring will be frozen and contributions to retirement accounts suspended for at least a year, FedEx said today in a statement.

The moves are part of $200 million in new savings toward a goal of more than $1 billion for the year as Memphis, Tennessee- based FedEx confronts “some of the worst economic conditions” in its 35-year history. U.S. air shipments fell 8 percent for the biggest drop in seven years last quarter as businesses and consumers curbed spending because of the recession.

“FedEx for good reason has been seen as a bellwether, and they’re playing the role there saying things are not good,” said Donald Broughton, an analyst at Avondale Partners who rates the shares “market outperform.” “Don’t look to FedEx for hope, at least from a volume perspective.”

FedEx Chief Financial Officer Alan Graf said volume patterns deteriorated during the quarter ended Nov. 30 on declines in industrial production and consumer spending, and that “we don’t believe we have reached the bottom.”

The pay cuts accompanied FedEx’s announcement that net income in the second quarter climbed to $493 million, or $1.58 a share, matching the average estimate of 12 analysts in a Bloomberg survey. Profit a year earlier was $479 million, or $1.54. Revenue rose 1 percent to $9.54 billion, the smallest quarterly increase in at least nine years.

CEO Pay

FedEx fell $1.37, or 2.1 percent, to $62.60 at 4 p.m. in New York Stock Exchange composite trading. The shares have fallen 30 percent this year, compared with a 25 percent drop for United Parcel Service Inc., the biggest shipping company.

Smith’s base salary last fiscal year was $1.43 million, and his total compensation including options and other incentive pay was $10.9 million, FedEx’s most recent proxy statement showed.

“Fred’s taking the biggest cut, and it reflects the core mentality of the company to take steps to manage through this,” said Dan Ortwerth, an Edward Jones & Co. analyst in St. Louis who recommends buying the shares. “They’re willing to do what it takes to control costs and preserve jobs.”

36,000 Salary Cuts

About 36,000 U.S. people are affected by the pay cuts, said Jess Bunn, a spokesman. FedEx has about 290,000 workers, including 13,000 independent contractors. Hourly workers won’t get pay cuts.

FedEx’s salary reductions came a day after Motorola Inc., the second-biggest U.S. seller of mobile phones, said it will chop the base salaries of co-CEOs Greg Brown and Sanjay Jha by 25 percent in 2009. Amkor Technology Inc., a provider of packaging for semiconductors, said yesterday that CEO James J. Kim will have his salary sliced in half, while senior executives take a 20 percent reduction.

FedEx reaffirmed its full-year earnings projection of $3.50 to $4.75 a share, and said it won’t give an estimate for the current quarter because of “significant economic uncertainty.” Second-half earnings will be 69 cents to $1.94, FedEx said.

Recent Reductions

FedEx has previously announced plans to eliminate 540 jobs at its freight unit and 650 at its Office printing shops, halt variable compensation payouts, and reduce labor hours as part of its effort to lower expenses by $1 billion.

The company said today it’s suspending matching contributions of employees’ 401(k) retirement plans for at least a year beginning in February and that it won’t give merit salary increases for some U.S. salaried employees. Those moves are expected to trim costs by $200 million the rest of this fiscal year, FedEx said.

The 8 percent drop in total air shipments was the 12th straight decline and the steepest plunge since the fiscal second quarter of 2002, when it fell 10.5 percent, Bunn said.

Overnight envelopes, one of the company’s most-profitable offerings, dropped 10 percent last quarter and overnight boxes slid 7 percent. Ground volumes were 1 percent lower as customers switched to this less-expensive alternative.

UPS Outlook

UPS said in October that domestic volume would probably fall about 4 percent for the three months ending Dec. 31. The Atlanta-based company’s air shipments plummeted 9.8 percent last quarter, the third straight decline, while average daily volume slid 3.4 percent.

FedEx’s fuel bill for the second quarter rose 9 percent to $1.1 billion. FedEx’s fuel surcharge for express packages is 15 percent, down from a record of 34.5 percent in August yet still high enough to prompt some customers to switch to cheaper options such as ground delivery.

The company typically has a two-month lag in recovering fuel costs through the surcharges, and benefits when fuel prices drop. Crude oil has fallen three-fourths from a July peak of $147 a barrel.

To contact the reporter on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

Last Updated: December 18, 2008 16:09 EST