Job Hunting

The Kindest Cuts

Why would anyone reduce their own pay? To share the pain.
Alix StuartJune 7, 2002

Kforce Inc. CFO Bill Sanders had a $350,000 salary coming to him this year under a three-year employment contract, no questions asked. But after the Tampa-based specialty staffing company suffered a $12.1 million net loss, a 23 percent revenue plunge, and persistent stock-price weakness in 2001, he reassessed his entitlement. “The bottom line is that we were asking employees to take no bonuses and no raises,” says Sanders. As managers, “we felt we had to take at least as much of a hit” as those stakeholders.

So in a January memo, which informed employees that salaries were being frozen and bonuses all but eliminated, Sanders also announced that he and his boss, CEO David Dunkel, had accepted 25 percent cuts in their base salaries, which automatically slashes their 2002 bonus potential by 37.5 percent. While a grant of restricted stock could help ease the pain for them–along with a handful of other Kforce executives choosing similar cuts–that’s hardly money in the bank. Indeed, the stock’s recent $5.25-a-share trading price must soar to $10 by next October for the executives to break even. Based on projections, says Sanders, “this was a meaningful reduction in compensation.”

Of course, plenty of CFOs at struggling companies continue drawing higher pay, contractually or otherwise. Indeed, some profit handsomely from sticking with their companies in tough times. A $1.5 million bonus and a $1 million share grant under terms of his December 2000 contract made General Motors Corp. CFO and vice chairman John Devine the highest-paid GM executive in his first year at the carmaker, for example. (With salary, Devine raked in more than $4 million.) Further, it may be argued that finance chiefs work harder in lean years, and thus should earn more pay.

Still, more than a few finance chiefs do take one for the team. At such recession-battered companies as Acxiom Corp., Agilent Technologies Inc., and Tektronix Inc., finance executives agreed to reductions of 10 percent to 25 percent in contracted salaries for parts of 2001 and 2002. Meanwhile, the executive team of medical-equipment maker Baxter International Inc. sharply reduced its bonus pool as part of a formal plan to acknowledge management regret for a faulty dialysis product that caused the deaths of more than 50 patients worldwide. Overall, according to Mercer Human Resource Consulting’s recent survey of 350 large companies’ proxy statements, base salaries declined for 4.8 percent of CFOs with at least two years’ tenure last year, while 54 percent had smaller bonuses.

Symbolic Sacrifice

In practical terms, companies don’t save much by docking executive pay, and the stock price generally doesn’t get a dramatic boost. So what’s the benefit?

“It’s all symbolic,” says Peter Oppermann, senior executive compensation specialist at Mercer, who has recently helped five companies design executive pay reductions. “It at least gives employees the impression, and rightly so, that the senior management is not being enriched at the expense of lower-level employees; that they’re all suffering the same.”

Sanders says the Kforce pay memo, which accompanied a press release detailing management’s intention to align itself with shareholder interests, prompted several admiring calls from bankers and securities analysts who said they were impressed with management’s sympathy for workers and investors. Employees reacted positively, too, he says, “because they said it showed we were sharing in the pain.”

Other finance executives have found reducing their own pay to be an effective first step toward solving such thorny compensation problems as underwater stock options. Last summer, 80 percent of employees at San Jose­based Redback Networks Inc., a telecom subscriber­management equipment maker, held options that were out of the money, reflecting the fact that the stock price plummeted from a March 2000 high of $191.03 to around $5 last August.

To make a start at recreating the upside potential that had existed in the early days, CFO Dennis Wolf helped chairman Pierre Lamond craft a two-pronged plan. They first lowered the strike price of outstanding options, then allowed workers to swap cash pay for additional options at an even lower strike price. The two executives feared causing widespread defections by forcing a salary cut on employees, so they tried persuasion by example: between August and March, the CFO and other top managers swapped 20 percent of their contracted salaries for options vesting this coming August. That helped convince about 1 in 10 workers to participate in the plan with them.

The $400,000 saved through the program barely makes a dent in the company’s $42 million annual operating budget, and the stock price has since further fallen toward $2 a share. Still, “we’ve been able to retain all the people we wanted to,” says Wolf. “And our expectation is that we’re not going to be at this stock price a year from now, and that people will make some serious money on this.”

Companies lowering executive pay sometimes find ways to minimize the effect on personal cash flow. Sanders was able to shift some of his deferred compensation into current pay, for example. And both Kforce and Redback confined their salary cuts to a preannounced period, assuring affected employees that future raises and bonuses would be based on original salaries.

For maximum effect on employee morale, Mercer’s Oppermann suggests emphasizing the cash salary hit that executives of struggling companies are taking. Top managers don’t make much impact when they say, “Gee, I’m not getting any options this year,” he says. “Some employees will look at that and say, ‘Big deal; neither am I.’”