Executive Pay: Time for a Trim


FedEx's Fred Smith isn't the only CEO taking a haircut. A survey finds at least 40 companies have filed plans to cut executive salaries

Shipping giant FedEx (FDX) made headlines on Dec. 18 when, in an effort to save costs, it cut the salary of its founder and chief executive, Frederick W. Smith, by 20%. Blaming the worst economic conditions in the company's 35-year operating history, the Memphis company also trimmed salaries for senior FedEx officers by 7.5% to 10%.

But FedEx is not the only company reducing executive salaries in the face of a deepening recession. The day before, Motorola (MOT) cut the pay of its co-CEOs, Greg Brown and Sanjay Jha, by 25%. And computer hard-drive maker Western Digital (WDC) went even further, slashing its CEO's annual base salary by a third, to $600,000. Other officers' pay was also reduced by 15% to 25%.

The once-rare practice is accelerating rapidly. At the request of BusinessWeek, executive compensation research firm Equilar plumbed its database and found that at least 40 companies have filed documents with the SEC in the last six months to cut the salaries of their senior executives. Twenty-six of those companies did so in November and December alone.

Honey, I Shrunk My Salary

In the past two months, Gannett (GCI), Gymboree (GYMB), and KLA-Tencor (KLAC) all reduced the salaries of their top brass. And Continental Airlines (CAL), JetBlue Airways (JBLU), and others have made moves to shrink the salaries of their top officers since June.

It's not as if these CEOs will take home nothing. Equilar's research manager, Alexander Cwirko-Godycki, says most pay cuts are 10% to 25% of CEOs' salaries, which average $660,000, according to a study by the Corporate Library, a corporate governance research firm. And while some companies are cutting executive bonuses for next year, too, other CEOs may still take home benefits, perquisites, and short- and long-term incentive-plan payouts that can dwarf the size of their salaries.

Companies are "cutting a portion of the smallest part of the pay package," Cwirko-Godyicki says. Thus "there's still a lot on the table for these folks."

Risky Assets for Bankers

On Wall Street, meanwhile, many top traders and executives are getting sharply lower bonuses this year—or none at all. That can take a much bigger bite out of their compensation than CEO pay cuts, since bonuses typically make up a multiple of a year's salary. Some firms paying bonuses are taking radical steps to do so: Credit Suisse is handing out a percentage of some of its bankers' 2008 compensation in illiquid assets, including mortgage-backed securities, the same risky assets that helped lay the groundwork for the financial crisis.

Many pay experts agree such moves can shore up goodwill among employees worried about layoffs. In some ways, cutting a CEO's salary is as much a leadership gesture as a cost-cutting move.

"Some people may think it's window dressing, but a reduction in base pay has a leveraging effect throughout the [company]," says David Wise, a senior consultant in the executive compensation practice at Hay Group, a management consulting firm. "Employees want executives to share in the pain, and this sends strong signals that [the executives] are willing to be held accountable."

That's especially so if employees' paychecks are being reduced, too, as was the case at FedEx, where all nonunion salaried employees' paychecks were reduced 5%. Some 13% of companies have cut salaries among employees or plan to do so in the next 12 months, according to human resources consultancy Watson Wyatt.

But like many of the cost-saving measures Watson Wyatt studied, from salary freezes to holiday shutdowns, that practice has doubled in frequency in just the last two months. Salary reductions, at the senior executive and especially at the employee level, are typically rare, says Laura Sejen, who heads up Watson Wyatt's strategic rewards consulting group. "Or at least," she catches herself, "it never used to happen."

McGregor is BusinessWeek's management editor.

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