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When Pay Cuts Look Just Fine

Workers Are Breathing Sighs of Relief as Companies Try to Avoid Layoffs


Marcus Barnes was enjoying a trip to California to celebrate a friend's wedding earlier this month when he checked the e-mail at his Little Rock, Ark., office. One message could have ruined anyone's vacation: His company was cutting almost everyone's pay by 5%.

But the news didn't bust his groove. In fact, Barnes, a product analyst at Acxiom Corp., and his wife, Rizza, who also works there as a marketing communications associate, were relieved and grateful.

"We were very glad. We thought things could have been worse," said Barnes, 27, who had been hired only two months earlier. "We were glad we still had jobs because it's a very good company."

Job security worries are running so high that when bosses and bean counters demand almost any other form of corporate sacrifice--even pay cuts--they can actually score points with the rank and file.

More than 406,000 announced job cuts in the first quarter might make layoffs look like corporate America's job one. But the fact is that many companies are taking pains to avoid putting people out of work. Corporate motives include fear of hurting morale and some measure of altruism. But more significant is the widespread belief that many of the layoffs of the early 1990s were just bad for business.

"The last time we had a layoff was 1991, and within a year we had an aggressive hiring program going again. So we looked kind of stupid," said Acxiom Chairman and Chief Executive Charles Morgan, who sought to avoid layoffs at the information technology company employing more than 5,400 people.

So companies are finding other ways to save money. Those include slashing perks, both lavish and incidental, that were fueled by the economic boom and efforts to keep up with the dot-coms. Now, the ax is falling on everything from first-class travel to free sodas. Extravagant galas and awards banquets are giving way to ice cream socials and pizza parties in corporate cafeterias. Companies are introducing four-day workweeks, and furloughs are making a comeback.

Last week, Sun Microsystems Inc. said it would send most workers home for a week in July. That followed a series of other actions by the Palo Alto server-computer maker that included reducing performance-based compensation for workers, travel costs, expansions and discretionary spending.

Several corporate executives said they see layoffs as a last resort because this slowdown, unlike the recession of the early 1990s, is playing out amid a tight labor market caused by the shrinking work force. As members of the gargantuan baby boom generation begin to retire, the number of workers ready to take their place will decline through 2010, according to government projections.

"The economy will recover. The talent shortage will not," said Richard Wellins, a senior vice president of Development Dimensions International, a Pittsburgh-based human resources consulting firm.

"Some [companies] expect 20% to 50% of leadership talent to retire in the next five to eight years," he said. "Therefore, one negative consequence of wholesale layoffs is that they will not be able to replace that talent when they need it."

Many companies still haven't recovered technical, professional and leadership talent lost during layoffs they imposed in the 1990s, which hampered them when the economy turned around.

"The last time, layoffs tended to end up losing more good people than bad people," Wellins said. "I think companies are a lot wiser today."

Studies support that view.

Only half of the downsizings during the 1990s led to increased profits, according to an examination of eight large companies by researchers at Indiana University's Kelley School of Business. They found that broad layoffs were least effective in achieving financial goals. Adverse consequences included a drop in quality, loss of expertise, reduced productivity and the need to hire consultants or rehire displaced workers.

Of more than 500 companies that downsized in the early 1990s, more than half failed to meet profitability and productivity goals, and only six in 10 reduced expenses, according to a 1993 study by Watson Wyatt Worldwide, a Washington-based human resources consulting firm.

"The research didn't get into exactly why, but you could presume that cutting your way to financial success doesn't necessarily work because you are not increasing productivity, and you haven't increased demand," said Tom Porath, a managing consultant of Watson Wyatt's Southern California practice.

"All you've done is decrease your work force, and when demand does turn around, you're not in a position to take advantage of it quickly."

At Management Recruiters International, a Cleveland-based staffing firm, executives have taken several measures to avoid layoffs among its 5,000 employees, including cutting by two-thirds the number of people sent to an annual convention in Puerto Rico and delaying the opening of three offices.

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