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Downsizing Pay, Not People

It's better to have all employees bleed a little than a few bleed to death.

That's the view at Agilent Technologies, the large test-and-measurement

equipment maker that on Apr. 5 announced a companywide salary reduction of 10% for its 48,000 employees. Unusual in a time of unimaginative daily downsizings, that move is getting applause from management experts -- for purely practical reasons.

"Many times, companies will lay all these people off, then the economy gets better and they have to do rehiring," says Kelly Mollica, associate professor of management at the Babcock Graduate School of Management at Wake Forest University in Winston-Salem, N.C. By holding onto workers now, Agilent is positioning itself to strike aggressively when the economy rebounds.

At least, that was CEO Ned Barnholt's reasoning when customer demand began to wane with the economic slowdown, says Robert Walker, chief financial officer of the Palo Alto (Calif.) company. The cuts took effect for the company's 200 senior managers on Apr. 1 and will kick in for the rest of the workforce on May 1. Expected to save $70 million per quarter, they will last until July 31, the end of Agilent's third quarter, and could be continued beyond that date.

NOT OVERREACTING. Walker won't rule out layoffs if demand doesn't bounce back. But he adds: "Our view is that what we are experiencing now, painful as it is, is a business cycle." He expects it to pass -- and that it doesn't merit an overreaction. After all, Walker notes, "it's hard, expensive, and time-consuming to get good people."

Other companies are taking the road less traveled in hopes of finding a

bridge to a presumably better 2002. At Acxiom Corp. in Little Rock, Ark.,

executives are hoping that a pay cut will help the company hang onto

employees it will need when the economy recovers. Under its plan, domestic

employees who make more than $25,000 a year -- all but 500 of the company's 6,000 workers -- absorbed a recent 5% reduction, a blow softened by grants of stock options equivalent to the employee's salary cut, according to a formula used by the company. "We believe the economy will rebound, and it's much easier to retain our highly-trained employees than go out and try and find them again," says Jonathan Portis, a spokesman for the database management company.

That theme also echoes at White Electronic Designs, a Phoenix microchip

packaging company. It announced on Apr. 10 that rather than lay off employees, it would cut pay 10% for senior management and 5% for salaried employees, with hourly workers remaining untouched. CEO Hamid Shokrgozar recalls searching for up to nine months during the recent boom to find suitable candidates for jobs in engineering and marketing. He has also spent time and money training employees. "As far as I'm concerned, employees are the assets of the organization," says Shokrgozar. "It doesn't make sense to eliminate the people we brought in over the last few years."

"COMPLETE NONESENSE." Many companies mouth such sentiments, of course. But few actually walk the talk, says Kim Cameron, a professor of organizational behavior at the University of Michigan's Business School. "Layoffs remain pervasive," he notes. "It keeps being a strategy of choice." After studying downsizings for 15 years, Cameron disapproves. He finds pay cuts in place of layoffs "humane and ethical" and says they have hidden benefits for employers. One, he says, is to instill the loyalty and team spirit that comes from shared adversity. Another is to prod employees to look for new ways to save money.

As with any unconventional strategy, however, pay cuts involve significant

risks. Which leads Gerald Meyers, also a professor of organizational behavior at Michigan, to label them "complete nonsense." Meyers was chairman and CEO of American Motors before it was taken over in 1987 by Chrysler, which is now part of DaimlerChrysler. He asserts that by cutting pay, especially when unemployment is low, companies invite their better employees to leave for competitors that dangle higher salaries, while lesser performers stay put. "You end up with a monster of mediocrity," he says. At the same time, he adds, companies continue to carry the expense of fringe benefits, which can run 30% or more of base pay.

Cameron sees some employee resentment as another danger if a workforce hasn't been managed well. Afterall, it would take a saint to make a financial sacrifice, happily, for the goldbrick in the next cubicle.

ONLY "TEMPORARY"? Indeed, a 1990 study of a large manufacturer in the Midwest found that employee pilferage rose during the time a pay cut was in place, says Jerald Greenberg, a professor of management at Ohio State University's Fisher College of Business and author of the report. The study also found, however, that in a department where the cut was handled sensitively -- with the company president appearing to explain the reasons for the salary reduction -- the theft rate was lower, he adds. The company was not identified in the study.

Walker says he doesn't expect Agilent employees to be overjoyed about getting less pay for the same amount of work, and he concedes that "some people are upset." But, he asserts, that isn't true for the majority. "Most employees prefer...that we are sharing the pain," he says. A case in point is Kathryn Morton, a distribution administrator at an Agilent plant in Wilmington, Del. "Most of us are pretty happy we aren't losing our jobs and hoping this is fairly temporary," she says.

Walker says the company timed its announcement to reach the press, investors, and its workforce simultaneously, because it wanted to make sure that employees didn't hear the news second-hand. And when word arrived, it came from the horse's mouth: CEO Barnholt announced it over the company's public address system and followed up with an e-mail message.

IMPRESSIVE BLOOD-LETTING. To some extent, Agilent's pay-cut plan grows out of tradition. The company is the 18-month-old offspring of Hewlett-Packard, which has a long history of stopping its cost-cutting short of layoffs, says Jeffrey Pfeffer, professor of organizational behavior at Stanford University's Graduate School of Business. During slow times, for example, HP would sometimes turn to "the nine-day fortnight," in which employees worked nine days every two-week period instead of 10, Pfeffer says.

Why more companies don't use pay cuts is difficult to say. Cameron believes that some managers would rather live with the swift pain of presenting a pink slip than with lingering discontent. And executives may believe that Wall Street is more impressed by a quick blood-letting, says Joel Brockner, a management professor at Columbia University's business school.

Some companies may simply be disloyal to their employees. Others may genuinely need to trim fat, Mollica adds. Moreover, no one can guarantee that the cuts will work. Look at brokerage Charles Schwab, which trimmed salaries of 750 top executives earlier this year -- and has ended up eliminating jobs anyway.

Still, if the economy bounces back quickly, Agilent may have the last laugh.

After all, the company would then be in shape to take on a reinvigorated market, says Deane Dray, an analyst with Goldman Sachs. In that case, he says, pay cuts "could prove to be a good decision." By Pamela Mendels in New York

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