The Incredible Shrinking Paycheck

What would you do if your company cut your pay tomorrow by 5 percent? Ten percent?

At companies like Agilent Technologies, workers don't have to wonder. The firm has asked every single one of its workers — from the CEO right down to the guy on the factory floor — to take a 10 percent cut in pay. As management sees it, a 10 percent paycut beats the 100 percent paycut of being laid off.

What was the reaction? "Well, as you can imagine, it certainly wasn't a joyful one," acknowledged Bob Walker, the company's chief financial officer. "It is a real sacrifice [for a] number of our employees. And there's just no way of getting around that."

From small dot-coms to huge companies like Agilent, firms are looking at pay cuts instead of layoffs — reducing costs while maintaining their workforce. From the corner office to the factory floor, salaries are being slashed.

A Growing Trend

Just a smattering of companies may be doing it now, but it's a growing trend. Think about it: The cost of laying people off and then rehiring them when the economy kicks back is prohibitive. With paycuts, companies can cut labor costs while remaining ready for the economy to gear back up.

Acxiom Corp. in Little Rock, Ark., asked employees to take a trade — voluntary pay cuts in exchange for stock options. Management at Kansas City Southern was asked to take a 7-percent to 10-percent pay cut.

Just today, Applied Materials, the biggest chip-making equipment manufacturer in the world, said that as part of a effort to cut costs it would hold off on raises and trim executive salaries.

Even Charles Schwab tried the pay cut route — suggesting that some employees take a day off without pay. But company attorneys scotched the plan — and layoffs followed.

But with unemployment still low, why would people sit still for a paycut? Why not quit and find another job? Because these companies say the cuts are temporary. And in some industries, layoffs lurk behind every computer screen.

Vote: Pay Cut or Job Security?

A Vested Interest, For Those Remaining

In several cases, employees have said that the pay cuts actually brought people closer together — it gave people a vested interest in setting the company right.

When 415 Productions, a Web design company based in San Francisco, needed to reduce labor costs by 35 percent, management took the problem straight to the employees.

The firm passed out a “survey of lesser evils” with questions like, “Would you stay at 415 if your salary was temporarily reduced?” and “Would you be willing to work as a part-time employee?”

Explained 415 CEO Grace Sanat: “We decided that a 35 percent layoff was not the right solution. … We thought that was too severe. It didn’t leave us flexibility to move forward and so we looked for a more creative solution.”

“Management asked us for cost-cutting solutions,” said employee Chris Xiques. “And people came up with the notion of taking pay cuts. So when management came back and said, ‘OK, we’ve decided you have to take a pay cut,’ it wasn’t a surprise.”

"And really, these creative cost cutting measures were all about saving a good job," added Xiques. "And so I was willing to take some austerity measures in order to keep this job, 'cause I like working here."

Even those 415’s employees who were ultimately laid off say that it was the right thing to do.

“It definitely made it easier,” agreed former employee Carrie Hausfield. “I know they valued our opinions. And I don’t think that there’s an easy way to do something like this. So they did the best they could.”

Cutting Back on the Baby Sitter

“Companies today are asking people to share in the pain,” said John Challenger of outplacement firm Challenger, Gray and Christmas. “They’re saying, ‘Our business is down, we don’t want to lose you, we want you to stay, but right now the only way to do that short of layoffs is to ask you to take a pay cut.’ ”

Added Challenger: “Asking employees to take pay cuts often depends on how much good will the company has in its bank. If the people trust the company they’re more likely to take the pay cuts with a fairly even temper because they know that company is struggling to try and make it work.”

In the case of 415, it offered a shorter workweek, with the requisite drop in pay, or a 5 percent pay cut. Management’s cut was double — 10 percent.

All this means personal budgets are taking a pay cut, too— no impulse purchases, no vacations.

For Dot Pang, who's been with Agilent for two years, there's 10 percent less salary going into her bank account. "I've been thinking of taking the bus to work to cut down on the cost of gas because that is, has skyrocketed, and that's one big area where I can save," she says.

For Xiques, it means fewer dates with his wife. “We have hired a baby sitter to come every week do we could go out on a date. We’ve scaled it back to twice a month. So we’ve halved the number of dates we go on,” he said.

But, he added, “A lot of people I know that are in this industry are looking for a job. So taking a pay cut doesn’t seem so bad when you compare it to unemployment.”

Andrew E. Serwer is editor at large for Fortune magazine, where he originated and writes for the "Street Life" column. He also has appeared on CNBC, CNNfn, Voice of America and PBS, and has published articles in TIME, Sports Illustrated and SLAM. For more, go to "Street Life" on