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Pay cuts: New trend takes hold

During hard economic times companies impose layoffs, offer buyouts, and freeze wages and hiring to reduce their expenses. But there’s an unusual tactic taking hold in this recession: pay cuts.

In 30 years of advising employers through up-and-down economies, Dave Van De Voort has seen companies impose layoffs, offer buyouts, and freeze wages and hiring to reduce their expenses. But now the human-resources consultant is seeing an unusual tactic taking hold in this recession: pay cuts.

“These are unprecedented times,” says Van De Voort, a principal based in the Chicago office of Mercer. “Many organizations are literally teetering on survival and so they have re-thought this issue of do we save money by getting smaller or by reducing pay and benefits and services.”

After the Sept. 11, 2001, terrorist attacks, the beleaguered airline industry shed jobs and exacted lower wages from pilots, mechanics and flight attendants. Eight years later, other employers are shedding jobs and cutting pay across industries, nonprofits and governments. The cuts come in various shapes and sizes: lower pay, reduced hours, and voluntary or involuntary furloughs.

Think about the high-profile pay cuts making the news: St. Paul Chamber Orchestra President Sarah Lutman is taking a 15.5 percent cut and the musicians, 12 percent; St. Paul Mayor Chris Coleman reduced his pay 8 percent and his staff’s by a smaller percentage; and Gov. Tim Pawlenty — whose $120,303 salary has been frozen for 6½ years — not only wants to freeze pay for state government workers, but he also proposes unpaid furloughs of 48 days over the next biennium.

Even a few CEOs are sharing some of the pain (Bloomington-based Toro Co.’s CEO is taking a 10 percent cut in base salary, for example), though their multimillion-dollar compensation packages continue to stun the masses.

An Employers Association survey taken early this year found that 10 percent of Minnesota employers plan to cut pay in 2009 while nearly half expect to freeze wages. In the 2002 survey taken after 9/11, 26 percent of respondents reported a broad-based wage and salary freeze in effect for all or part of the year. An additional 2 percent actually cut pay at that time.

The most-surprising trend in the 2009 survey was the “extent of the freezes,” said research director George Gmach of the Plymouth-based group. “We’re seeing double the freezes of 9/11. We didn’t see that many pay cuts after 9/11, but we’re seeing them now more than ever.”

As Gmach explains it, businesses and other institutions are now “trying to preserve cash and stay positioned to move forward” once the economy turns around. Adds Van De Voort of Mercer: “The general consensus is that in 2001 and 2002, when companies were undergoing difficult times, they over-cut. They got too small — they cut the meat and the bone. … The current thinking is, ‘We need to be careful not to put ourselves in a position where we have to rehire.’ It takes more time and it’s very expensive.”

Make no mistake, companies and institutions continue to reduce their work forces as the economy slides. Minnesota lost 98,100 jobs between March 2008 and March 2009 — the worst numeric loss since World War II, according to the Minnesota Department of Employment and Economic Development

Exceptions amid the sacrifices
If you’ve managed to hold onto your job, you might be asked to sacrifice in some way this year. If you’re fortunate enough to get a raise, it’s likely in the range of 1.9 percent to 3.2 percent though there are exceptions up and down, according to the Plymouth-based Employers Association.

University of Minnesota basketball coach Tubby Smith is getting a 5 percent raise, according to his contract, bringing his compensation package to $1.8 million. His annual base salary of $630,000 is the highest at the U, well above Athletic Director Joel Maturi’s $336,250 salary and President Robert Bruininks’ $455,000 — both of whom are under salary freezes along with the rest of the U’s leadership.

Maturi frequently finds himself having to defend Smith’s salary along with other coaches’ six-figure pay packages, given that no U professor comes close to making that kind of money. The highest-paid faculty member is economics professor Patrick Kehoe, who makes $342,691. Some might argue he’s really earning his pay during this economic downturn.

College athletic programs, Maturi says, are at the mercy of the market. He points out that Smith’s successor at the University of Kentucky recently signed for $4 million a year. The other factor to keep in mind, he said, is that coaches’ salaries are paid out of ticket revenue — not tax dollars. The athletic program generates $65 million of its $70 million annual budget, he said.

“My job is to make sure coaches are paid fairly: No. 1, to attract them, and No. 2, to retain them. But I also have to be sensitive to the academic mission of the university” and that “high-profile” coaches are paid more than professors. “Quite frankly, it’s a crazy business. All of us know it, and we wonder where it’s going to stop,” said Maturi, who has no plans to freeze or cut the pay of coaching staff.

Taxpayers League: Sacrifices should start at the top
Phil Krinkie, president of the Taxpayers League of Minnesota, agrees with Maturi that coaches’ compensation is a crazy business. But the former Republican state lawmaker thinks the fact that taxpayers are picking up 60 percent of the tab for the U’s new football stadium ought to dictate some sacrifices when the state is facing a $4.6 billion deficit. Krinkie thinks that any public employee making more than $100,000, Smith included, ought to take a 10 percent pay cut — not just have their pay frozen as Pawlenty proposes.

“The problem with pay freezes or furloughs is that they fall very unjustly across the spectrum,” Krinkie said. “If we look at pay freezes or pay reductions, it should be top-down — not bottom-up.” The janitor making $25,000 to $30,000 is going to suffer more than someone making more than $100,000, he said. “I’m just saying that in challenging times we see businesses taking salary cuts, we see job-sharing, we see all sorts of measures in an economic downturn. Yet it seems as though if we talk about a government worker getting laid off, ‘what a terrible consequence.’ “

Is Pawlenty going to take a pay cut after he and his cabinet have been under a 6 ½-year pay freeze? It’s unlikely and here’s why: According to an email from spokesman Brian McClung, “Governor Pawlenty has said if the Legislature passes a bill cutting their pay and the pay of constitutional officers equally that he would support such a bill.”

But our state legislators, who make $31,140 annually, haven’t had a raise in 10 years though their per-diem pay has increased. For each legislative day, representatives now receive $77 and senators receive $96 on top of their salaries. No proposals to raise per diem or legislative salaries are on the table.

State Rep. Phyllis Kahn, who chairs the State Government Finance Committee, fully expects her Republican counterparts to propose cuts in per-diem pay “just to make a political statement.”

“Hopefully they won’t pass,” said Kahn, DFL-Minneapolis. She offers an amusing suggestion for legislators who oppose per-diem pay: “I’ve always said that anyone who voted against per diem isn’t allowed to collect it.”

The only raise proposed for a high-ranking state administrator is for the head of the Minnesota State Board of Investment, said Kahn, whose committee oversees pay of government workers.

Fuming over furloughs
So, the governor, the constitutional officers, the governor’s cabinet, the Legislature and the U’s coaches aren’t likely to take pay cuts. But there’s still the matter of furloughs, a form of pay cut, proposed for state government employees. Not surprisingly, unionized workers aren’t wild about the idea.

“Furloughs will not balance the budget — they will not even make a dent in the deficit,” said Jim Monroe, executive director of the Minnesota Association of Professional Employees, which is negotiating a contract for 12,500 members. “Furloughs tend to be the current quick-fix for government funding problems, and the issue we’re dealing with here in Minnesota is a longstanding instability in the budgeting process.”

It’s a tough time to be negotiating a new contract, and AFSCME won’t do it in the news media, said Jennifer Munt, public affairs director for the union, which represents 19,000 state workers. The average salary in the union is $37,000. “It’s so tough to bargain in a climate where we’ve got a budget deficit and a tanking economy.” Still, she offers an “interesting factoid”: “If the governor was to terminate every single employee today, it would only trim the budget by 4 percent. … To suggest that state employees are driving the deficit is exaggerated.”

Meanwhile, some public servants are taking matters into their own hands. St. Paul Mayor Chris Coleman took an 8 percent pay cut, the first in his work history. He let go three people in his office and cut the remaining workers’ pay, and he is freezing top administrators’ salaries. Unionized city employees, however, just received 3.25 percent cost-of-living adjustments per a contract negotiated before the economic downturn.

Across the river, it’s too early to tell whether Mayor R.T. Rybak’s $100,481 salary — and the pay of city of Minneapolis employees — will be cut or frozen, according to a city spokesman. 

Coleman, a lawyer by training, will make $99,846 after the cut. “I’ve tried to work my way up the ladder — not down it,” he says drily. On a serious note: “I hope it [the pay cut] sends a signal that we’re all in this together, first of all. I look at CEOs of corporations losing money and getting large pay increases at the same time they’re reducing their work forces, and I think that’s a terrible signal. I value the work that the 2,700 people do [for city government], and I didn’t want them to think my words are hollow.”

Curbing CEO pay
Speaking of those CEOs, a recent Grant Thornton survey of U.S. companies found that 15 percent plan to reduce executive salaries and half are freezing executive base salaries this year. More than a quarter didn’t give bonuses in 2008, and 69 percent said 2008 bonuses were below targeted levels. For 2009, 85 percent of companies said this year’s bonus plans will be the same or lower than in 2008.

Another study of S&P 500 CEO compensation found that their median pay fell by 6.8 percent from 2007 to 2008, according to Equilar, a compensation analytics firm in Redwood Shores, Calif. Median cash bonus payouts fell 20.6 percent in the same period. The median compensation package of CEOS was $8.4 million, down from $10.5 million.

“This is a pretty unprecedented level of CEOs taking reductions, and it’s absolutely indicative of a tough economy,” said Equilar research director Alexander Cwirko-Godycki. CEO compensation is typically tied to a company’s performance and the stock value because CEOs receive stock grants and options on top of base salaries. Given the freefall in the stock market since last fall, those packages are worth considerably less.

The uproar over bonuses for AIG executives and others after a taxpayer bailout is unlikely to garner sympathy from the public over a decline in CEO compensation packages. Outrageous bonuses make headlines, after all.

Besides, the take-home pay of a CEO is 344 times the typical American worker’s take-home pay, according to “Executive Excess,” a report (PDF) by United for a Fair Economy.

Thirty years ago, chief executive paychecks were 30 to 40 times the American worker’s paycheck, the report noted.

“There have been so many [outrageous bonuses], it’s hard to put them in badness order,” said Paul Hodgson, senior research associate for The Corporate Library, a Portland, Maine, firm that tracks executive compensation and corporate governance. “The AIG ones were pretty preposterous, but so were the ones paid out to Merrill Lynch. I think most of them were made to companies that received money from taxpayers. But that was partly the fault of the Treasury because it didn’t track where the money was going. Fortunately, we have another president in power now.”

The b-word
Could bonus be the new b-word? Hodgson laughs. “In some ways, bonus is becoming the b-word. We’re going through a period where companies have done so badly and where we should be seeing bonuses going down in frequency. If we don’t see that, then we’ll see some significant turmoil.”

3M Co. CEO George Buckley didn’t get a bonus in 2008 but he did receive $2.8 million in “non-equity incentive compensation” (cash), $3.3 million in stock awards and about $4.8 million in stock options, according to the company’s proxy filed with the Securities and Exchange Commission. Buckley’s total compensation, including his base salary of $1.72 million, came to $12.9 million in 2008.

The proxy [PDF, page 41] shows Buckley’s package declined 25 percent from 2007, largely because of a decline in incentive compensation and the value of 3M shares. 3M’s stock price fell 32 percent and net income was down 15.5 percent from 2007. Still, the Maplewood-based company managed a 3.3 percent increase in sales for the year even after a disappointing fourth quarter.

Equilar, however, reports that Buckley’s compensation actually increased by 21 percent in 2008. Equilar uses a different formula from the SEC to calculate CEO compensation packages. Though the New York Times used Equilar’s calculations for a recent CEO pay report, a 3M spokeswoman calls the computation “inaccurate.” Equilar’s methodology is explained here.

Since late last year, 3,600 3M workers have lost their jobs and another 3,600 are being offered early retirement. Merit raises for remaining workers are being delayed in 2009, but no pay cuts are planned.

“We’re deferring merit pay increases, and that is being applied to executives,” 3M spokeswoman Jacqueline Berry said. “We continue to provide incentive compensation [tied to performance] to thousands of employees — not just executives.”

No question, pay cuts and freezes are tough to swallow in hard times. But if they keep more workers in their jobs, so much the better, said Dave Van De Voort of Mercer. “The silver lining in the cloud, and one of the reasons organizations are doing this, is really an optimistic view for the long term. They don’t want to cut the work force and then not be able to take advantage when things improve. This is a more sophisticated view than in the past.”

Casey Selix is a news editor and staff writer for MinnPost. She can be reached at cselix[at]minnpost[dot]com.

To readers: What’s happening in your workplace? What do you think will happen once the economy turns around — are you confident pay cuts will be restored and that freezes will be lifted?