Jobs: A Smarter Squeeze?

To lessen layoffs, some companies are cutting pay and benefits

At the height of the late '90s boom, DiamondCluster International Inc. (DTPI ) paid whatever it took to recruit and retain workers for its tech consulting practice. The Chicago-based firm lavished staffers with stock options, bonuses, and perks, including a private performance of Cirque du Soleil. But with the tech collapse causing a drop in demand for DiamondCluster's services, the company asked many of its 1,400 employees to give back some of their gains; indeed, workers making more than $50,000 were required to take as much as a 20% pay cut. Management's share-the-pain approach didn't sit well with many workers who, with their stock options already underwater, say the cuts hit too hard. "People are lying low, but when the economy improves they'll be out of here," says one senior associate.

The discontent inside DiamondCluster reflects one of the biggest management challenges that corporations have had to face in years. After a decade of doling out signing bonuses, stock options, and other perks like candy during the go-go '90s, a generation of managers is wrestling with an issue many have never faced before: how to run their businesses and maintain worker morale at a time when many companies are facing fierce pressure to rein in costs.

With the labor shortages of the late '90s still fresh in their minds, many corporate leaders are taking a new tack in the first recession of the New Economy: Rather than opting only for the sweeping layoffs of the past, which often require managers to hastily rehire when the economy recovers, companies ranging from Hewlett-Packard Co. (HWP ) to Charles Scwab Corp. (SCH ) are trying to limit layoffs by freezing or cutting pay across the workforce.

At the same time, huge cost pressures have put benefits on the block too: Ford Motor Co. (F ) and Lucent Technologies (LU ), among others, recently cut back their matching contributions to salaried employees' 401(k) retirement plans, for example, while Delphi Automotive Systems Corp. (DPH ) also temporarily halted a program that gave salaried workers as much as $1,250 for each child in college. If the recession drags on, the cuts "could get a lot worse," says Steven E. Gross, a compensation consultant with William M. Mercer who predicts that as many as half of all major corporations could cut or freeze pay and benefits in the coming year, up from a third this year.

Still, many management experts warn that by imposing across-the-board cuts in pay and benefits, moves that touch far more workers than traditional layoffs, executives could be creating big morale problems: Many workers may perceive the moves as a management ploy to take back some of their hard-earned gains of the past decade. That could serve as a drag on productivity during the downturn--and a catalyst for massive defections down the road. "When the economy strengthens, these companies will have hell to pay when their better employees leave," says Robert Morgan, president of the human-resources consultant with Spherion Corp.

Some companies who imposed pay cuts in the past now say they would never do it again. Way back in 1987, managers at General Electric Corp.'s (GE ) struggling electric-motor division canceled a scheduled $1.30-an-hour raise for line workers and instead slapped them with an 11% pay cut. While the moves generated $25 million in savings, GE admits that worker morale--and productivity--plummeted. "That one has never been forgotten," warns William J. Conaty, a senior vice-president of corporate human resources.

Many recruiters and management experts argue that companies would be better off biting the bullet by laying off their least-productive workers, while being careful to lavish enough on truly valued employees to ensure they stick around. Salary and benefit cuts "are the last thing you want to do in a down economy," warns Jeff Christian, chairman of Christian & Timbers, a leading executive search firm. "It's never good to take anything away from the people you want to keep."

Still, many companies say they can't afford to single out stars. Instead, they are going to great lengths to cushion the pain of the widespread cuts. At companies like Micron Technology Inc. (MU ), Tribune Co. (TRB ), and even DiamondCluster, top executives are taking larger sacrifices than they're asking of employees--a gesture that's helped convince some of the rank-and-file that they're all in this together. Others are giving stock options to offset the pay cuts. After trimming the pay of every worker earning more than $25,000 by 5%, database management company Acxiom Corp. (ACXM ) granted stock options to the affected workers as an inducement to stay. "Whatever we can do to retain talent, we're going to do it," says Cindy K. Childers, Acxiom's leader for organizational development.

Other companies are restoring small perks that workers missed most, or doling out other precious goodies that don't cost the company money--especially more free time. It seems petty, but workers at Agilent Technology (A ), which imposed a 10% pay cut, were delighted that their favorite gourmet tea was restocked in some office pantries. And at Management Recruiters International Inc., which isn't paying a holiday bonus this year, managers are making new efforts to accommodate worker requests for more flexible schedules--and shorter weeks. "People aren't working as insanely," notes MRI spokeswoman Karen Bloomfield.

And though it may sound trite, managers find that employees are more willing to accept cutbacks as long as someone takes the time to clearly explain why such measures are crucial to the company's well being. At Rosenbluth International, a Philadelphia-based travel agency, chief executive Hal Rosenbluth found that a series of staff meetings smoothed the way for 10% pay cuts in the wake of September 11. The real purpose of the meetings: to let staffers vent. Says Rosenbluth: "I wanted to let people throw eggs at me."

But such gestures may not be enough to assuage workers in high-demand sectors like technology, finance, and entertainment. With the talent shortage causing salaries to shoot into the stratosphere in the late '90s, some companies are exploiting the current downturn to bring pay levels back to prior levels. And that brings management hurdles of its own. In the late 1990s, with many studios racing to replicate Walt Disney Co.'s (DIS ) phenomenal success with The Lion King, average salaries for animators soared from $70,000 to $200,000--and to upwards of $1 million for star animators.

But with many studios having since pulled back, companies such as Disney are slashing salaries to as much as 30% below current levels as contracts come up for renewal. "This was a cost structure that had gotten out of hand," says Thomas Schumacher, head of Walt Disney Animation. "We are still offering attractive salaries. We just don't have to bid them up the way we had to a few years ago." Predictably, that isn't sitting well with some animators. "It's pretty dehumanizing to be told, `You're very good but we can always go out and find someone to do it for less,"' says one animator, who is now looking to join a rival studio.

Finding a new job in a recession, of course, isn't always an option. At Teradyne Inc. (TER ), a Boston-based maker of chip-testing equipment that recently asked workers to take their second pay cut of the year, Vice-President of Corporate Relations Tom Newman is betting the recession will keep workers in place for now. "This will sound bad, but there are not a lot of good choices around," notes Newman. As long as that's true, managers have little to worry about. But once the job market takes off again, it will be a different story. That's why smart managers are doing all they can to keep their employees happy during the dark days of economic winter.

By Dean Foust in Atlanta and Michelle Conlin in New York, with Peter Burrows in San Mateo, Calif., Faith Keenan in Boston, Roger O. Crockett in Chicago, and bureau reports

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