HP cuts base pay for execs and employees; Will tweak benefits to cut costs

HP cuts base pay for execs and employees; Will tweak benefits to cut costs

Summary: Amid a tough fiscal first quarter report and weaker than expected demand, HP is cutting base pay for executives and its workers. The cost cutting was mentioned by HP CEO Mark Hurd on the company's earnings conference call on Wednesday.

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Amid a tough fiscal first quarter report and weaker than expected demand, HP is cutting base pay for executives and its workers. 

The cost cutting was mentioned by HP CEO Mark Hurd on the company's earnings conference call on Wednesday. HP met Wall Street expectations in the first quarter, but sales and the outlook for the second quarter disappointed. Hurd said:

During the quarter we took a number of actions to reduce expenses including extending the December holiday shutdown, significantly reducing travel and eliminating other discretionary spending. We will continue to take actions to create a more variable cost structure including reducing base pay and certain benefits across the company beginning in Q2.

Consistent with our philosophy for pay for performance we intend to increase variable pay in total if HP meets its FY09 financial objectives. These actions will increase the company’s flexibility to more effectively scale our expenses to our revenues in this difficult environment. 

A memo from Hurd obtained by ZDNet reveals some more detail. Specifically, HP will implement the following pay changes:

  • Hurd's base pay falls 20 percent. (Hurd's salary was $1.45 million in 2008).
  • Base pay of executive council members falls 15 percent.
  • Other executive pay will fall 10 percent. 
  • Base pay from other exempt employees falls 5 percent. 
  • Base pay for non-exempt employees falls 2.5 percent.
  • 401(k) and share ownership plans swill change. 

Here's the full memo:

Today, HP announced first quarter results amid one of most difficult economic downturns that any of us has ever faced. I am proud to say that we continue to execute well in this very challenging environment.

We grew revenue 1 percent year-over-year, or 4 percent in local currency, and you need to look at these numbers a little differently this quarter. For the first time in a long time, the dollar was strengthening, so the currency conversion was actually a headwind for us. We also continued to show strong operating leverage with non-GAAP operating profit up 10 percent year-over-year. This was a solid performance, and I thank all of you for your efforts.

But really, Q1 was like a tale of two companies. 

HP Services — as a result of EDS and TS — had a strong quarter, delivering virtually all of the local currency revenue growth and more operating profit than any other business. It's gratifying, because this performance was possible because of the hard work we've been doing to restructure those businesses.

When you take HP services out of the mix, it's a very different picture. PSG had revenue down 19%. ESS had revenue down 18%. IPG had revenue down 19%. In fairness, across IT and even other industries, product businesses are struggling in this economic climate. And we did gain share in key market segments. PSG and ESS gained roughly 1 and 3 points of share, respectively. In IPG, quite frankly, we still have work to do across a number of dimensions like inventory, both owned and channel inventory. 

In an environment like this, there's no margin for error and no tolerance for inaction. To give you a little insight into my world, after we report our earnings, we engage in a dialogue with analysts and investors. They're going to ask what we're doing in light of the current environment to right-size these businesses.

The math is pretty straight forward. From a productivity standpoint, you're supposed to reduce headcount on par with declining revenue. If you believe the environment isn't going to improve, you should take a bigger cut to get in front of the problems. You can do the calculation, as easy as I can. We have about 100,000 people in our product businesses, with revenue down roughly 20%, and an environment that may not get any better in 2009.

I'll be asked by investors, "Where's the job action, where are you taking out this roughly, 20,000 positions?" Well, I don't want to do that. When I look at HP, I don't see a structural problem of that magnitude. There are pockets where restructuring needs to happen, and areas where actions will be taken as part of our ongoing workforce optimization process. But at a company-wide level, I don't believe a major workforce reduction is the best thing for HP at this time.

I think we are fundamentally sound, and when the economy picks up, I want HP to be strong, and to take share and to outgrow the market. I said it last quarter, my goal is to keep the muscle of this organization intact. But we do have to do something…because the numbers just don't add up and we need to have the flexibility to make the right long-term investments for HP.

So we are going to take action. We have decided to further variablize our cost structure by reducing base pay and some benefits across HP. My base pay will be reduced by 20 percent. The base pay of Executive Council members will be reduced by 15 percent. The base pay of other executives will be reduced by 10 percent. The base pay of all other exempt employees will be reduced by 5 percent. For non-exempt employees, base pay will be reduced by two-and-a-half percent. Additional efficiencies, including changes to the US 401(k) plan and the share ownership plan, will also be implemented. Of course, the implementation of all of these actions is subject to compliance with local laws and regulations. Follow-up communications will detail the timing and the plans in your location. 

This does not change our pay-for-performance strategy at HP. If we outperform, and there is a chance we will, then we will increase the total amount of variable pay. In fact, the financial flexibility we're gaining helps put us in a better position to compete and to win in the marketplace, and fund the bonus program this year based on pre-adjusted salaries. If the company performs well, if our individual businesses perform well and if you perform well, then you could potentially make up the difference with your bonus. I can't promise you anything, but I tell you...there is a chance...if we get this right.

To be clear, these actions don't make up for all of the decline in revenues. We're also benefiting from the tough actions we've taken over the last few years. People always asked, "Why are we so focused on getting costs out in good times?" Now…is why that work was so important. We've been able to bank some of those savings, and we're making a withdrawal, which along with the actions we're taking today, I hope, will get us through this recession.

Again, there are no guarantees. If the environment gets worse, if the downturn lasts longer than we're assuming, if our performance declines, we'll have to reassess. But for now I believe this is the right thing for the strength of HP.

I know this is a tough time. But if we get this right, HP can be the kind of company that not only has led, but will extend its leadership. We can emerge from this recession in a powerful position to create value for our customers, our shareholders and our people for years to come.

Thank you.

Mark

Topics: Banking, Emerging Tech, Enterprise Software, Hewlett-Packard

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28 comments
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  • Hurd made $47,000,000 last year.

    So his $280K cut actually amounts to about half of one percent of his total compensation. This ratio pretty much holds true for all the executives who receive a small base pay and many times that amount in stock and deferred compensation.

    But the rank and file who don't get lots of extras lose the full 10 or 5 percent. Very convenient.
    terry flores
    • NO ONE....

      And I mean NO ONE is worth that kind of money. It is just plain ludicrous and the Share Holders should be livid.

      The top 1% of wealth in this country are completely destroying the US with this type of shi.... crap.

      I have absolutely zero problems with people making good salaries. 47 million is just pure insanity though.
      BitTwiddler
      • Actually..

        I really don't think its anyone but HP and their shareholders business as
        to the pay of the CEO. I don't care if hes being paid 47 million or not
        because i'm not involved with the company. Everyone keeps getting so
        livid and calling for regulations of pay over thing that are none of their
        business.

        Going on and on about "the wealthy this" and "the wealthy that" is just an
        easy way to create class division in this country and get votes for
        politicians who are themselves part of this elite group. Grow up already,
        if you have a problem with their business practices then don't deal with
        them and move on.
        ChrisOPeterson
        • Come on...

          I've heard this exact same argument from people who think that unions should be outlawed. Instead of saying "grow up already", why not acknowledge the problem that clearly exists? It should be no surprise to anyone that both unions and executives raking in huge sums of cash are causing financial problems across pretty much all markets. Myself, I have a bigger problem with a CEO pulling in $47MM/year than a union laborer pulling in $47/hour but then I grew up in union country. Even major league sports have recognized the need for salary caps. If there isn't a ceiling somewhere, greedy people will figure out a way to bleed their company to death. It doesn't matter to them as long as they can collect their golden parachute and move on to the next sucker. As we can see pretty clearly, it's the economy as a whole that pays the price.
          jasonp@...
          • You might be right about the salary caps...

            ...but it's the responsibility of the stockholders to set them, not that of some Washington bureaucrat. (Unless, of course, the company involved is taking bailout money, in which case it should be a precondition that the CEO and senior executives be fired for letting the company get into such bad shape in the first place.)

            A lot of these insane CEO total compensation numbers are a direct result of stockholders tacitly accepting them, either just by handing their proxies over to management, or by blindly accepting the corporate positions in votes.
            Henrik Moller
          • Unfortunately

            The stockholders have no say about executive pay; isn't that weird? The owners of the company have no input into executive compensation?!! Sorry, your plan won't work. All is not as well as you think.
            emcauley
        • Too late to declare class warfare

          Sorry but it's too late to declare class warfare; that was declared in 1982 by Ronald Reagan.

          From that point until now, the productivity of the American worker has gone through the roof, while the salary of the American worker has gone through the floor. The American Middle Class has nearly disappeared as a result, even as the upper 5% of the wealthy have seen their wealth grow exponentially as the concentration of their wealth accelerates.

          Now, we have eliminated the law that disallowed them from creating oligarchic dynasties. By not taxing their wealth when they pass-away, we are destroying the competitive capabilities of next generation of entrepreneurs.

          People are having a problem with these business practices and they are going to deal with them, but not by simply moving on. It will only be resolved with constructive laws that directly confront these problems.
          emcauley
          • Tired Rhetoric

            Where is the specific evidence to back your claim? How do you now define middle class? Is it a moving target as the Democrats had in 2008? Time to get engaged in facts not rhetoric.
            Consultant_of_Choice
      • RE: HP cuts base pay for execs and employees; Will tweak benefits to cut costs

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        anonymous
  • RE: HP cuts base pay for execs and employees; Will tweak benefits to cut costs

    No job and benefits vs. Paycut but still having a job and benefits....hmmmm... not too hard a call there...
    K-Mech
    • Understood, but not really the point...

      It's still executive compensation abuse, plain and simple.

      Shareholders should be LIVID.
      BitTwiddler
      • Are you kidding?

        Shareholders are ECSTATIC. Savings are savings, and this saves a PR hit.

        PROTIP: Shareholders don't care who gets laid off. They are bottom-liners. People could die, and they wouldn't care if they got paid.
        superbus
        • One thing to keep in mind

          We are all shareholders. Maybe not of HP specifically, but anybody with any sort of pension is invested in the stock market, probably via mutual funds.
          Michael Kelly
  • RE: HP cuts base pay for execs and employees; Will tweak benefits to cut costs

    Well I am one of those employee's. In fact I was brought on to HP as transition, I am/was an EDS employee. We (EDS an HP company) are the only profitable part of HP. While last December when it was "Pay For Performance" Time HP came out and said NO BONUS for EDS Employees. Thanks HP! Glad we are making Mark Hurd his Bonus.

    Everyone here is reading there resumes and going to be flooding an already saturated job market.

    You know the best part of this is - NO ONE in my direct management has told us a thing! I am getting more information from ZDNet

    HOW SAD IS HP!!

    Signed
    I got effed
    Axisdenied
  • This sets a horrible precedent...

    First off, the Executives won't feel a thing. Really...

    It's the in-the-trenches workers that actually get the work done that will suffer the most.

    I'd say lop off the Exec's even more, and leave the little guy, barely scraping by, alone!

    Typical Corporate BS. Take care of the Execs, and to hell with the hard-working lower level staff.

    I sure hope HP doesn't get a single dime of any 'rescue money'. They don't deserve it.

    I bet the Exec's have a $100,000 party to celebrate the savings!
    BitTwiddler
    • LMAO

      1) "Precedent"? This has been happening since the concept of money came into existence. Where have you been?

      2) Those execs are crucial to the operation of the business - that's why they are worth multi-millions. Every big bucks executive is, in any business. The so-called little guys who are just scraping by are a dime-a-dozen. Let them eat cake.

      Signed,

      Richard Grasso
      http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20080709/REG/207531775
      ejhonda
      • "Those execs are crucial to the operation of the business..."

        Ri<i>dic</i>ulous!

        Corporate CEOs aren't gods. They're bright enough, I suppose--I've known a good many of them--but generally nothing spectacular.

        Most CEOs have sales and marketing backgrounds. And what they're particularly good at is selling and marketing themselves. Just like they convince customers that they <i>need</i> this widget or that, they convince stockholders and boards of directors that they're indispensable Great Men, with the Magic Touch (tm), and not only that the company will fail without them, but that the only way they can be convinced to keep employing that Magic Touch is by lacing their palms with lots and lots of silver.

        There's a big distinction between being the owner of a private company--such companies generally reflect the vision of their owners and may well critically depend on that vision. But the CEOs of public companies... they're generally just the last guy to show up at meetings.
        Henrik Moller
    • Which story did you read?

      [I] [B] * Hurd?s base pay falls 20 percent. (Hurd?s salary was $1.45 million in 2008).
      * Base pay of executive council members falls 15 percent.
      * Other executive pay will fall 10 percent. [/B]
      * Base pay from other exempt employees falls 5 percent.
      * Base pay for non-exempt employees falls 2.5 percent.
      * 401(k) and share ownership plans swill change. ][/I]

      The bulk of the cuts are in executive pay. They could have just laid of 10% and left their salaries alone. These people know how to run a company long term. The #1 thing a company can offer employees is not money, perks, etc, it is BEING APPRECIATED.

      In doing this, yes, a small pay cut sucks, but it tells employees that they are important and appreciated and we WANT you to stick around while we tackle tough times.

      So seriously, which story did you read?

      TripleII
      TripleII-21189418044173169409978279405827
      • RE Which story did you read?

        LMAO!!!

        What koolaid are you drinking?
        Appreciated? Ha! He has nowhere else to cut...his slash for cash mode is closing in on him.
        HP announce more layoffs? PLLLLEASE! Whatever would the market think of the viability of a company when all it keeps doing is laying off employees.....
        Appears you may have been assimilated.....all the best to you.
        KO from TO
  • What is all this?

    Companies are laying off workers left and right! Millions of people are already on the unemployment roles. Some of the largest corporations in the US are begging the federal government for money!

    Facing likely infuriating stockholders and a 20% drop in revenue in one fiscal quarter, what does Mark Hurd do? Does he fire nearly a third of HP's workforce and keep his own wallet nice and hefty, NO. He finds a way to keep the company going, to make up for most of the lost revenue, and not put anyone out of work. There was nothing that said he had to cut his own pay, regardless of bonuses or not. Now so many of your are coming on here making venomous-filled charges that he's screwing his own people??? HELLO!!!

    I'm no CEO, executive, or even a frigging manager of any kind. I'm one of the nameless working masses like so many others. After reading this article and his letter on the subject, I was filled with pride at how he'd approached this problem. He did all this and didn't beg for ONE STINKING DIME from the feds! I agree if a corporation like all these banks and car manufacturers that have run their companies into the ground come begging the feds for money to bail them out, the government should get MAJORLY involved in the running of that company and consider reorganizing the entire management structure. If we don't recognize and acknowledge smart, caring corporate leaders like Mark for doing all they can to protect their companies and the people who are part of it, what do you think will happen??

    I salute Mark Hurd for taking this approach and, as an IT professional, will make an effort to encourage business for HP. This company's reputation has been steadily improving in the IT industry for the past couple of years now and with the actions of their CEO during this recession, I feel no qualms about supporting HP at this point.The rest of you need to stop being so hate filled for others who happen to make more money than you! That sort of minimalist attitude isn't going to help you or anyone else.
    ccpeters