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Sixel: Firms cutting frills to head off job cuts

By L.M. Sixel

Sixel: Firms cutting frills to head off job cuts
  • December 14, 2001

With the economy sputtering, many companies are doing what they can to avoid cutting jobs.

They've cut expenses. They've shut down for a week of unscheduled vacation. Their executives have taken pay cuts.

Now they're freezing employees' wages in the hope that they can keep expenses under control until the expected recovery begins next year.

Tony Pannagl, managing partner of IS&T Staffing Group, already cut out the Christmas bonuses, the annual holiday fancy dinner and the bottled water contract. Now it is time to freeze the wages of 10 employees who recruit and manage accounts.

The market has been tight, said Pannagl, who places information technology contract workers and recruits permanent information technology employees for some of Houston's largest companies.

Pannagl plans to keep the wages frozen until his company's financial situation turns around. He's hoping that will be early next year, and based on what he has been hearing from clients, there should be a lot of work coming in January. But until then, he has to deal with the fact that his permanent placement business, which brought in $675,000 in revenues last year, has generated half that this year.

While his temp business is up 25 percent, the margins are a lot lower than in the permanent recruiting side of the business. There is a lot of overhead to pay, such as salary and benefits.

It also hasn't helped that other companies have failed and left IS&T in the lurch, marking the first time his 4-year-old business has ever had to write off bad debt. One high-tech firm that went into bankruptcy owes him $20,000; a shuttered law firm disappeared with a $15,000 outstanding bill.

The employees aren't the only ones feeling the pain. All the partners, including Pannagl, took a 50 percent pay cut.

Retaining personnel investment
Employees have been supportive, Pannagl said. They understand.

John Challenger, chief executive officer of Challenger, Gray & Christmas outplacement company in Chicago, said he has been seeing many companies eliminating raises, cutting executive pay and dropping cash bonuses.

The widespread attempt to cut salaries and freeze raises is something Challenger said he hasn't seen much of in the past. But companies know they have invested so much into their employees that they'll lose a lot if they let them go. And they remember how much effort they put in just a short time ago to hire them in the first place, Challenger said.

A survey by human resources consulting firm Watson Wyatt found that 2 percent of companies have frozen or cut pay for their hourly, professional and midlevel employees, and another 2 percent are considering such a move.

Continental Airlines, which has faced severe financial trouble since the Sept. 11 terrorist attacks, has decided to put off making its merit raises until later in the first quarter.

The raises typically are given in January, but the airline wants to make sure traffic picks up before it makes its commitment, a spokesman said. However, the raises that are already scheduled won't be affected for employees who work under employment contracts.

'Take care of my people'
In the past, companies have resorted more often to layoffs instead of cutting salaries.

The logic has been for companies to leave wages intact for those who are retained and lop off the workers they don't need, said Steve Currall, associate professor of management, psychology and statistics at the Jones Graduate School of Management at Rice University. But that approach harms a company's culture.

When employees focus on why Joe got laid off and Louise didn't, it creates enormous distractions and hurts trust in the organization, he said.

But when a company imposes wage reductions instead of layoffs, the work is retained and you have the employees remaining when the rebound occurs, Currall said.

The owner of a small manufacturing company in Houston has seen business drop off fairly substantially. And he gave a wage freeze some serious thought.

But in the last day or two he decided to go through with the planned raises.

"I want to take care of my people," he said, asking not to be identified. They have come to expect it, and he wants to make sure they get what they deserve.