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You may have survived your company's latest round of layoffs, but that doesn't mean you're out of the woods yet.
A growing number of employers are resorting to salary cuts as the recession drags on. This month alone, A.H. Belo Corp., publisher of the Dallas Morning News, and the Atlanta Symphony Orchestra have announced pay reductions of as much as 15%.
At some companies, the cuts affect only executive and senior management levels, but many others are adopting an across-the-board approach or tiered salary reductions. Some companies are imposing permanent cuts, and some are promising to return employees to their full pay -- eventually.
In some cases, companies are trying to confine the pain to higher levels of management. Recreational-vehicle maker Winnebago Industries Inc. in Forest City, Iowa, implemented a tiered salary cut in March. Chief Executive Bob Olson took a 20% pay cut, and other senior executives took a 10% cut; all other salaried employees' pay was reduced 3%. In February, Hewlett-Packard Co. CEO Mark Hurd took a 20% reduction, and other employees will forfeit between 2.5% and 15% of pay, following similar moves in January by Advanced Micro Devices Inc. in Sunnyvale, Calif.
Rob Katz, the chief executive of Vail Resorts Inc., a mountain resort chain based in Broomfield, Colo., employing 15,000 people, is forgoing his 2009 pay and taking a 15% pay cut in 2010. His employees will give up between 2.5% and 10%, depending on what they earn. The cuts took effect in April.
A January survey by global outplacement firm Challenger, Gray & Christmas found that of 100 human-resource professionals surveyed, 27.2% reported that their companies have imposed a salary freeze or cut. A February survey of 245 large U.S. companies conducted by human-resource consultants Watson Wyatt Worldwide found that 4% of companies plan to reduce salary over the next year, with 7% already implementing pay cuts.
Until the current recession, the practice of imposing pay cuts has been 'very rare,' says John Challenger, chief executive officer of Challenger, Gray & Christmas, despite recent calls for capping executive salaries and bonuses.
Other companies have imposed cuts but also added incentives to recoup lost salary. In March, law firm Thompson Hine instituted a pay cut for the first time since the Great Depression. The firm's roughly 200 associates and nonpartner lawyers, whose salaries typically start in the low $100,000s, were forced to take a $17,500 decrease.
'This was an unusual and aggressive step,' says David Hooker, managing partner at the Cleveland-based law firm. 'I was nervous [because] anytime you do something like this, it creates anxiety.' The caveat: Lawyers who bill 1,750 hours can recoup $7,500 of their lost pay, and those who bill 1,900 hours can recoup all of it.
Jared Oakes, a 30-year-old associate in the firm's real-estate group, says that though he isn't excited about the pay cut, the measure brought some relief. 'In the weeks leading up to the announcement, there were announcements of large law firms making layoffs, and you feel like, 'When is the shoe going to drop at our firm?'' he says. 'The natural anxiety of the unknown was taken away.'
Still, Mr. Oakes has other reasons to be anxious about his salary reduction: He and his wife Jillian, 31, a social worker, are expecting their first child, and he says the pay cut is part of the reason she will limit her maternity leave to three months, rather than the four she had planned.
Organizations in dire straits may have no choice but to slash salaries across the board. After being unable to make payroll in mid-March, South Carolina's Charleston Symphony Orchestra cut the wages of all its staff and employees by 11.4%. Musicians in the orchestra also took a 11.4% hit in the form of unpaid time off. Combined, the efforts will save $180,000. 'This is very, very painful for them,' says Ted Legasey, the orchestra's board president. 'It's a huge sacrifice. These people aren't highly paid to begin with.'
Some employers are trying to lessen the blow. At Momentive Performance Materials Inc. in Albany, N.Y., a chemicals and specialty materials company with 4,600 global employees, any worker forced to take a pay cut will receive an extra week of paid vacation for each quarter that the reduction remains in place.
Similarly, nonunion New York Times Co. employees were forced to take up to a 5% pay cut, effective this month, but were given 10 vacation days in return. Vail Resorts is granting full-time, year-round employees stock-based incentive compensation on a sliding scale. 'It's partially to ease the blow, but it's also giving people some ownership to participate in our future success,' says Mr. Katz, the CEO.
If your firm isn't clear on how long the cuts will last, experts say you should consider them permanent. Kenan Abosch, head of workplace consultants Hewitt Associates' North American compensation practice, says employees should brace themselves for the lasting effect of a pay cut. 'I expect the majority of employees not to recover what they lost,' he says. 'We don't expect salary-increase budgets to come back . . . for several years.'
Heidi Shierholz, a economist with the Economic Policy Institute, a left-leaning think tank based in Washington, says the exception may be in service-based firms in areas such as hospitality, insurance and health, where she expects salaries to bounce back once demand picks up.
If you are forced to take a salary cut, financial planners advise creating a realistic new budget and sticking to it. Consider obvious cutbacks, such as cable TV and restaurants. If your pay reduction is severe, you might have to take more drastic action. Although it's usually taboo, you might want to take a scalpel to your retirement and college-savings contributions to free up some cash, at least temporarily. Joseph Montanaro, a financial planner with financial-services company USAA, says if necessary, reduce your 401(k) account contributions to the level at which you receive the full employer match. He also advises reducing or stopping contributions to a child's college fund until your salary returns to its normal level.
Emily Rybinski, director of marketing for the Charleston Symphony, says she and her husband, who live in Johns Island, S.C., will scale back on spending as a result of the pay cut. 'There is some level of uncertainty [among colleagues] about mortgage payments and bills,' the 28-year-old says. The couple also decided to trim their contributions to their Roth individual retirement accounts. She and her colleagues have also begun selling furniture and other items on Craigslist or in yard sales.
'Even our cat took a budget hit -- no more toys and treats for him,' Ms. Rybinski says.
