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The Salary Squeeze Is On

When it comes to compensation, Newtonian principles rarely apply: What goes up usually doesn't come down. But with several chunks of the economy in the grip of a slowdown, many Americans are finding to their dismay that starting salaries, which soared into the heavens before the boom ended last year, may be subject to those pesky laws of gravity after all.

One general manager at a steel company in Cincinnati was pulling down $100,000 a year -- ample enough to cover college tuition for his two children -- before he got pink-slipped at the beginning of 2001 in a slump-related downsizing. He has been pounding the pavement looking for a job that pays the same, but the news on the street is grim: The going rate for a similar position in any industry, not just in beleaguered steel, has fallen to the $60,000 range, he says.

DIGGING INTO SAVINGS. "Companies are saying that the economy won't support the kind of salary I was making," says the 54-year-old job applicant." They're saying they can't pay that anymore. Two years ago, there were more jobs, and the steel industry wasn't in nearly as bad shape." The manager adds that he may have to give up his country-club membership and dig into his savings for the first time to keep his kids in school.

Job seekers across the nation are facing the same unsavory choices as the name-your-price job market of the late 1990s is turning into a take-it-or-leave-it one. The reason for the compensation crunch is simple. With at least 500,000 layoffs this year, unemployment is rising, so far to 4.5%. In a number of industries, the supply of folks eager to earn a paycheck exceeds demand. And so, elementary economics tells us, the price must come down.

"What happened last year is that salaries were going well above the market rate because companies were looking for anybody they could get their hands on," says Bill Coleman, vice-president for compensation at Wellesley (Mass.), which provides recruiting and compensation tools and services. "Companies were paying premiums to get people in. Those premiums are going away -- along with all that water-cooler talk of 'how come they hired this guy at $20,000 more than me?'"

RUDE AWAKENING. Still, the wheels haven't fallen off the gravy train in every industry. Workers with unique skills in the technology and health-care fields still have the upper hand in salary negotiations, recruiters and compensation consultants say. And people who haven't been furloughed are still considerably better off than they were just a couple of years ago. But in virtually every industry, employees who tell people what to do rather than doing it themselves -- manager types -- may face a rude awakening when seeking a new job.

Nowhere is the deflation in starting pay more apparent than at technology startups, which many recruiters and compensation consultants blame for setting off the bidding war for talent in the first place. With carcasses of dead dot-coms littering the landscape from Silicon Alley to Silicon Valley, tech companies are getting new recruits on the cheap -- or at least, without the fat-cat packages they had to offer the past few years.

Scott Dunklee, a partner in Lancer Group, an executive search firm in Menlo Park, Calif., says early-stage technology startups are now offering $250,000 in base salary for chief execs, compared to the $350,000 that was standard fare just a year ago. Top dogs can still make up the difference in stock options and cash bonuses, he says, but investors increasingly want to see results before shelling out the big bucks. "Venture capitalists are really putting their foot down," Dunklee says.

HALF THE TAKE. Even where base salaries are holding up, there's no reason to party. In the battered telecommunications industry, for instance, bonuses and commissions are shrinking dramatically, more than halving the yearly take for many, says Mark Haering, manager of operations in Indianapolis for Management Recruiters International, a large executive search firm. Just a year ago, a sales or marketing exec in the sector with a base salary of $95,000 could score as much as $400,000 annually through commissions and other variable incentives, Haering says. Today, that same exec is looking at a gross of $150,000 tops.

"If there is one sector where there has been a pervasive softening in compensation plans, it's communications," Haering says. "I think people are starting to realize that it got unreal for a while."

Wall Street is also getting a reality check, says Joan Zimmerman, executive v-p at G.Z. Stephens Inc., an executive-recruiting firm for the financial and investment community. Salaries on the Street have always been peanuts compared to the Godzilla-size bonuses that can push annual compensation for traders and analysts into the millions. Last year, it was common for heads of divisions at big investment banks to jump to competing firms for up to a 100% increase in total compensation, with packages ranging from $5 million to $10 million, Zimmerman says. But those halcyon days are gone, along with the days when the Nasdaq, now sloshing around in the 2,100 range, traded above 5,000.

"You will not see those kinds of numbers this year," Zimmerman says. "Management believes that with the market where it is, there should not need to be a premium."

"1997 WAGES." Even blue-collar workers are singing the starting-pay blues. Diesel mechanics are signing on at $18 an hour, whereas a year ago, they got $22, says Ron Deabler, president and owner of two employment agencies in Wisconsin, in Fond du Lac and Brookfield, which place workers in skilled-trade jobs. Machinists who cut metal are taking gigs for as little as $15 an hour, when last year they could command $18, he says. "Because of low unemployment, they were getting a premium," Deabler says. "We're back to 1997 wages. They are not taking it well, but their other choice is not to work."

The switch from a seller's to a buyer's market leaves companies feeling a bit ambivalent. They're glad to get fresh recruits at a discount -- or at least at what they view as a fair market rate. But the economic pullback that gave them the hiring clout has in many cases hurt their business. "It's a double-edged sword," says Ed Cuoco, chief operating officer and co-founder of onExchange, a Waltham (Mass.) company that makes software and provides services for trading derivatives online. "It isn't like we are sitting back here rooting for the slowdown. All the ships have lowered a bit."

There's no question, though, that thanks to the turn in the economy, onExchange has been able to lure new hires at lower rates. Just a year ago, the few database administrators who strutted into onExchange's offices for an interview were demanding up to $250,000 in salary, Cuoco says. Nowadays, candidates are lining up for the same job at $80,000 to $95,000. "The quality of the candidates we are getting is very high," Cuoco says. "Their salary requests are within reason. There has really been a change."

FEWER COUNTEROFFERS. When jobs were plentiful, candidates could play employers off one other and sell themselves to the highest bidder. "Now there are simply fewer vacancies," says Lori Kletzer, a labor economist and a visiting fellow at the Institute for International Economics, an independent think tank in Washington, D.C. "Employees have less of a chance of playing the counteroffer game."

Another Waltham company, Wildfire Communications, which makes speech-recognition technology, also reports that staffing uses up less of the company's resources today. Lyn Van Huben, Wildfire's staffing manager, says the 130-person company hasn't adjusted salaries -- but it also hasn't had to throw in as many relocation packages and sign-on bonuses to close deals with new hires. "Less than six months ago, I made an offer to an engineer who was shocked that I hadn't included a sign-on bonus," Van Huben says. "That doesn't happen anymore."

Even the lucky employees who got hired during happy days may end up being not so lucky after all. They could be the first to go in a layoff if their salaries are viewed as out of line, say consultants. Or their pay increases could be slowed until the rest of the pack catches up, according to Jim Bowers, a Philadelphia-based vice-president at Hay Group, a compensation-consulting firm. "If they have superstar pay, but their performance doesn't reflect that, there is going to be some sort of adjustment," Bowers says.

STILL STRONG. Among the remaining pockets of good fortune, graduate business schools report that salaries for their MBAs haven't yet come under pressure. Whether they'll stay that way, however, depends on how quickly the economy bounces back. Offers to this year's grads were generally made last fall, before the slowdown really set in. So next year's class may be the one to feel the sting if the economy doesn't rebound. At the University of Virginia's Darden School, 37% of this year's spring grads went to consulting firms, which offered median base compensation of $110,000, a $10,000, or 10%, jump over last year.

"I don't think we are going to see cutbacks in MBA salaries, but I don't think we will see these dramatic increases," says Anne Harris, Darden's assistant dean of career development. "The ball is in the companies' court."

Indeed, Harris says that this year consulting firms are asking some MBAs who got offers last fall to postpone their start dates until as late as Jan. 1 of next year, in hopes the economy will be better by then. In return, they're offering carrots such as monthly stipends and reimbursement of second-year tuition to coax the grads to stick around. "Some companies are getting creative on how they're keeping students on the hook," Harris says.

PYSCHOLOGICAL IMPACT. So, pity the poor job seekers? More of them may have to take loans to keep their kids in college. And they may have to put meat loaf on the table, instead of filet mignon. The psychological effects can be tough to handle, too. "I can't tell you what this does to my self-esteem," says a former manager at General Electric, the mother of both a first grader and a college senior, who was making $130,000 before she left an overseas assignment to move back to Cincinnati. The strategic-planning and corporate-development positions she's seeking that match her experience and skills are now paying no more than $80,000.

Still, compensation consultants note that many employees hired during the fast and loose boom times were simply making too much based on what they could contribute to their employers. A recalibration was inevitable, they argue. "Many people were getting overpaid for the skills they had," says Dan Moynihan, a principal at Compensation Resources Group, an executive-compensation consulting firm. "We must remember, however, unemployment is still at 4.5%, despite the layoffs. People are still finding jobs doing something." Better a lower-paying job, it seems, than no job at all. By Eric Wahlgren in New York

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