Paying To Keep Your Job

By Daniel Eisenberg

Assembly-line workers at Ford and Chrysler no longer chat about whether they'll spend their $5,000-to-$10,000 year-end profit-sharing windfalls on a family vacation or a motorboat. This year there's little profit to share. Many also stand to lose $10,000 to $20,000 in reduced annual overtime pay. And their white-collar bosses aren't doing much better. Ford's 6,000 executives won't be getting any bonuses. The people who sell the cars and make most of their money from commissions are suffering much the same fate. Joe Torchia peddles Chevies at a dealership in Racine, Wis., where business was down 27% in September from the year before. So he and his wife Karen have had to cancel a wedding-anniversary trip to Las Vegas and halt a home-remodeling project.

All these workers are in effect paying to keep their job--and it's a trend that's accelerating far beyond the auto industry. Suddenly, everyone from $1 million-a-year investment bankers to middle managers and department-store clerks is facing a reduction of 10% to 100% in bonuses, profit sharing, stock options and commission payments. Some workers are even taking cuts in base salaries. Many employers and economists believe this newfound flexibility in pay may help keep unemployment a bit lower than it has been in previous downturns. But even as it cushions the blow, it is also spreading the pain to far more Americans. Robert Reich, Labor Secretary in the first Clinton Administration and now a professor of economics and social policy at Brandeis University, observes that "the biggest problem people will face this time around will be not the loss of jobs but the loss of income."

Almost half of all U.S. companies have already suspended or are actively considering suspending bonus and incentive pay this year, according to a survey by WorldatWork, an association of human-resources professionals based in Scottsdale, Ariz. Such "non-salary compensation" represents a far bigger share of total pay for workers at practically all levels than ever before, increasing nearly threefold since the last time the U.S. economy was in a slump this deep, in 1990-91.

As a result, downsizing is no longer the only way for businesses to slash their payroll costs. After working so hard and spending so much to recruit employees during the talent wars of the past decade, more firms are desperately trying to hang on to their workers while still cutting labor costs--which account for fully two-thirds of most companies' expenses. "One of the great successes of the U.S. economy has been putting flexibility into the wage structure and compensation plans," says Ira Kay, a compensation consultant at Watson Wyatt Worldwide, a human-resources consultancy. Variable pay "is a shock absorber." So much so, in fact, that today it could be helping to keep unemployment as much as a full percentage point lower than it would otherwise be--a savings worth 1.4 million jobs--according to Harvard University economist Richard Freeman. It's a stark contrast to the dark days of the Great Depression when, as economist John Maynard Keynes famously wrote, rigid wages exacerbated the situation by giving employers little choice but to hand workers their walking papers.

To be sure, variable pay is not a cure-all for unemployment, as last week's grim layoff announcements made clear. General Electric said it would lay off as many as 4,000 workers at its aircraft-engines division, Corning added an extra 4,000 to the mix, and Sun Microsystems said it would have to ax close to 4,000 of its own. Nearly 250,000 layoffs were announced last month, bringing the total for the first nine months of 2001 to 1.37 million, according to the outplacement firm Challenger, Gray & Christmas. Though the unemployment rate stayed flat at 4.9% in September, the bulk of the damage, including more than 100,000 layoffs announced in the airline and aerospace industries, hasn't yet taken its toll.

The buffering effect of bonuses has grown steadily in recent years--an estimated 5% to 10% of all workers have access to some kind of variable pay. About 60% of middle managers making $60,000 to $100,000 are eligible for bonuses, up from 40% a decade ago, according to Watson Wyatt. Among companies with more than 500 employees, roughly 40% of all workers get some kind of variable pay, estimates compensation consultant Towers Perrin.

They may not elicit much sympathy on Main Street, but no one is more affected by the bonus economy than the people on Wall Street. Year-end bonuses, which account for as much as 90% of annual compensation of investment bankers, could fall as much as 70% this year. With initial public offerings, mergers and acquisitions and other staples of the business slowed to a crawl, many bankers can kiss their new BMW or Connecticut country home goodbye. A number of lawyers and other professionals are in similar straits. "We share the gain, but we also share the pain," says Tower Snow, 53, chairman of Brobeck, Phleger & Harrison, a major Silicon Valley law firm, which will grant bonuses to fewer than 100 of its 650 associates this year and won't hand out any of the $1,500 bonuses typically given to non-attorneys.

Like bonuses, stock options in recent years have spread far beyond the top executive ranks. But with share prices down, many options are now worthless. "Employees already have a lot of underwater options. To rub it in with even lower-priced grants doesn't help much," says Diane Gherson, principal and head of employee-pay consulting service at Towers Perrin.

Instead of concentrating the pain of cost cutting on a bunch of unlucky souls through layoffs, many companies are distributing it more equitably. "Employees look at this as another time when they are effectively investing in the company's future," says Kenneth Goldman, chief financial officer for Siebel Systems, a software maker based in San Mateo, Calif., that eliminated most bonuses this year. Still, that sense of solidarity goes only so far. With the best people still in great demand and ready to jump ship at a better offer, businesses will probably find a very selective (and quiet) way to give out some rewards.

Until recently, corporate America would never consider cutting the salaries of many to avoid cutting the jobs of a few. But these days, a wide range of businesses, from San Francisco ad agencies and high-tech outfits like Agilent to steelmakers in Pittsburgh, are breaking the taboo. "We did a 7% layoff that probably would have been 15% had we not done some creative things," says Charles Morgan, 58, CEO of the database-management firm Acxiom, of Conway, Ark. In April the company made a 5% reduction in salaries for people earning more than $25,000, then gave stock options to 2,000 other employees who took a voluntary 5% cut. "Not only did we save 400 or 500 jobs," says Morgan, "but everybody now is a big shareholder." It seems to be working. Just last week Acxiom announced that it expects to meet or exceed analysts' earnings estimates for the quarter that just ended--a rarity nowadays.

When Joe McClure gathered his 160 employees at the Montrose Travel agency in Montrose, Calif., to explain the temporary 10% pay cut they would all be taking, there was hardly any of the usual office grumbling. After all, thanks to the nation's collective travel gridlock, many of their peers had already lost their jobs--including 16 workers that McClure himself had to let go to guarantee that his $118 million-a-year business would make it through the current turbulence. "When you look at the big picture, our situation is a lot better," says Maria Meza, 37, a travel agent who has been at Montrose for six years. To handle the pay cut, she has scaled back her weekly housecleaning service to every other week and eats out less often with her husband and three children.

For Ollie Galam, owner of Executive Clothiers, a men's store in Prospect Heights, Ill., today's hard times have triggered a reappraisal of his salespeople's pay formula. He is considering lowering typical base salaries from $40,000 to $35,000 and offering higher commissions. "We have to shift more of the risk to employees," Galam says. "The owner can't take all of it anymore."

Because sometimes it doesn't pay off--for employee or owner. In May, Robert Barton of Burr Ridge, Ill., took a $10,000 pay cut when he switched from his old job at an energy trade publication in Washington to a position as a manager at a business-intelligence outfit in Chicago, lured by the prospect of earning hefty commissions based on the business he helped bring in. "I saw the upside of this arrangement," he recalls. Soon enough, he saw the downside. On Sept. 14, the national day of mourning for the terror attacks, he was let go during his lunch hour. Now neither Barton nor his wife Sherry, who quit a job last January to take care of her dying mother, has any health insurance. With an eight-year-old daughter to support, they're expecting to have to borrow from their retirement accounts just to pay their mortgage.

There are other drawbacks to variable pay. A fair number of performance-bonus plans are structured so that at least part of the money has to be paid out to employees as long as they meet their individual or departmental goals, regardless of how the company fares as a whole. You can bet shareholders will have some questions about those charges at the end of this year. Also, variable pay, by its very nature, puts a much higher premium on a company's ability to monitor and track the progress of its workers as well as communicate with them, which many organizations still don't do very well. "You can't pay for performance unless you can measure it," says Paul Dorf, managing director of Compensation Resources Inc., a consulting firm in Upper Saddle River, N.J.

While recognizing that variable pay helps keep the ranks from being further depleted, organized labor knows that it can be a double-edged sword. The decline in profit sharing was a key factor in the United Auto Workers' decision not to discuss additional wage or contract concessions after DaimlerChrysler's financial problems started last winter.

Most important, and perhaps ironic, a downturn in the bonus economy could cause a wider ripple effect than traditional layoffs. "The pain is now spread through more people in the company," notes Steven Gross, a compensation expert with the firm William M. Mercer consulting. "The drop in bonus pay will have an effect on consumer spending. And it could be dramatic." Just how dramatic? Thanks to cutbacks in variable pay, personal income in the first quarter of next year could drop as much as $30 billion, according to a study by economist John Youngdahl of Goldman Sachs.

Steve Feldman, a travel agent in Highland Park, Ill., certainly hopes that's not the case. His income, based primarily on commissions at the Far Horizons agency, is already down 25% this year. That's not enough, however, to make him trade his job for the security of one with a more dependable, flat salary. "Even though it's riskier," he says, "there's a greater possible reward." Like millions of other workers nowadays, Feldman, who specializes in organizing gambling junkets, might just have to wait a little longer to hit the jackpot.

--With reporting by Steve Barnes/Little Rock, Bernard Baumohl and Unmesh Kher/New York, Wendy Cole and Maggie Sieger/Chicago, Jeanne McDowell/Los Angeles and Joseph R. Szczesny/Detroit

With reporting by Steve Barnes/Little Rock, Bernard Baumohl and Unmesh Kher/New York, Wendy Cole and Maggie Sieger/Chicago, Jeanne McDowell/Los Angeles and Joseph R. Szczesny/Detroit