Paying To Keep Your Job

Assembly-line workers at Ford and Chrysler no longer chat about whether they'll spend their $5,000-to-$10,000 year-end profit-sharing windfalls on a family vacation or a motorboat. This year there's little profit to share. Many also stand to lose $10,000 to $20,000 in reduced annual overtime pay. And their white-collar bosses aren't doing much better. Ford's 6,000 executives won't be getting any bonuses. The people who sell the cars and make most of their money from commissions are suffering much the same fate. Joe Torchia peddles Chevies at a dealership in Racine, Wis., where business was down 27% in September from the year before. So he and his wife Karen have had to cancel a wedding-anniversary trip to Las Vegas and halt a home-remodeling project.

All these workers are in effect paying to keep their job--and it's a trend that's accelerating far beyond the auto industry. Suddenly, everyone from $1 million-a-year investment bankers to middle managers and department-store clerks is facing a reduction of 10% to 100% in bonuses, profit sharing, stock options and commission payments. Some workers are even taking cuts in base salaries. Many employers and economists believe this newfound flexibility in pay may help keep unemployment a bit lower than it has been in previous downturns. But even as it cushions the blow, it is also spreading the pain to far more Americans. Robert Reich, Labor Secretary in the first Clinton Administration and now a professor of economics and social policy at Brandeis University, observes that "the biggest problem people will face this time around will be not the loss of jobs but the loss of income."

Almost half of all U.S. companies have already suspended or are actively considering suspending bonus and incentive pay this year, according to a survey by WorldatWork, an association of human-resources professionals based in Scottsdale, Ariz. Such "non-salary compensation" represents a far bigger share of total pay for workers at practically all levels than ever before, increasing nearly threefold since the last time the U.S. economy was in a slump this deep, in 1990-91.

As a result, downsizing is no longer the only way for businesses to slash their payroll costs. After working so hard and spending so much to recruit employees during the talent wars of the past decade, more firms are desperately trying to hang on to their workers while still cutting labor costs--which account for fully two-thirds of most companies' expenses. "One of the great successes of the U.S. economy has been putting flexibility into the wage structure and compensation plans," says Ira Kay, a compensation consultant at Watson Wyatt Worldwide, a human-resources consultancy. Variable pay "is a shock absorber." So much so, in fact, that today it could be helping to keep unemployment as much as a full percentage point lower than it would otherwise be--a savings worth 1.4 million jobs--according to Harvard University economist Richard Freeman. It's a stark contrast to the dark days of the Great Depression when, as economist John Maynard Keynes famously wrote, rigid wages exacerbated the situation by giving employers little choice but to hand workers their walking papers.