Hewlett-Packard Cuts Employee Pay as Silicon Valley Retrenches

Hewlett-Packard Co. Chief Executive Officer Mark Hurd spent three years cutting costs to lift profit. Now he’s targeting employee pay to ride an economic slump he says will last the rest of the year.

After reporting a 13 percent drop in first-quarter profit, the world’s largest personal-computer maker said it will reduce Hurd’s base salary by 20 percent, executives’ pay by 10 percent to 15 percent, and most employees’ salaries by 5 percent.

“In an environment like this, there’s no margin for error and no tolerance for inaction,” Hurd wrote yesterday in a memo to employees that was obtained by Bloomberg News. “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.”

Hewlett-Packard’s pay cuts are a further sign that the economic crisis that roiled Wall Street last year has spread to Silicon Valley. The decision, following Hurd’s announcement of about 24,700 job cuts in September, is part of a cost- containment effort among companies dealing with the worst economic crisis since the Great Depression.

Hewlett-Packard, based in Palo Alto, California, fell as much as $2.38, or 7 percent, to $31.70 yesterday in extended trading after the announcement. The shares closed at $34.08 on the New York Stock Exchange.

Since June 2008, at least 106 companies have reduced their executives’ pay, according to Equilar Inc., an executive- compensation firm in Redwood City, California. Out of 106 companies tracked, 39 percent are in the technology industry, making it the largest industry undertaking executive pay cuts.

‘More Egalitarian’

“Technology companies tend to have a more egalitarian culture,” said Alexander Cwirko-Godycki, research manager at Equilar. “CEOs are trying to share the pain with the rank and file. Mark Hurd’s 20-percent reduction is pretty consistent with what we’re seeing.”

The rest of Silicon Valley is feeling the pain. Intel Corp., the world’s largest semiconductor maker, has eliminated its budget for merit pay or promotions, CEO Paul Otellini said last month in a memo to employees. He said he received e-mails from employees saying they would rather take pay cuts than lose a job or see co-workers terminated.

Applied Materials Inc., the largest maker of machinery used to manufacture semiconductors, announced pay cuts of 10 percent for senior executives effective Feb 9., adding to an earlier reduction of 10 percent. That news came after CEO Mike Splinter reported Applied’s first net loss in more than five years.

Freezing Pay

“Across America and American industry, executive pay is going to be a hot topic for at least the next year,” said Alan Johnson, founder of Johnson Associates Inc., a New York-based compensation consultant. “There’s certainly a fervor when one company does it that others may have to match.”

Yahoo! Inc., owner of the second-most popular U.S. search engine, froze annual pay raises for 2009, while its larger rival Google Inc. has curbed hiring and gave most workers a G1 mobile phone in place of a $1,000 cash gift for the holidays.

Hewlett-Packard determined pay cuts based on an analysis of its cost structure and its 2009 profit and sales goals, Chief Financial Officer Cathie Lesjak said yesterday in an interview. The company chose salary reductions over job cuts because “we only want to do layoffs when we have structural problems that we want to solve,” Lesjak said.

Profit Falls

Hewlett-Packard reported first-quarter sales yesterday that missed analysts’ estimates and reduced its earnings forecast for the year as PC prices fall and demand for PCs, printers and other equipment wanes worldwide. Sales in the year ending in October will decline 2 percent to 5 percent from $118.4 billion in 2008.

“If the company performs well, if your individual businesses perform well and if you perform well, then you could potentially make up the difference,” with a bonus, Hurd, 52, told employees in the memo, which was confirmed by spokeswoman Emma McCulloch. “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.”

The reduction chops at least $290,000 off Hurd’s salary, based on his 2008 pay. Hurd’s total compensation was valued at $42.5 million last year, according to regulatory filings.

For some technology companies, hanging on to engineers who will create future hit products is more important than cutting costs in the short term.

“We have a wage freeze right now, a cap on hiring and we’re reducing some services internally -- we’re not buying brand new computers for people,” Qualcomm Inc. CEO Paul Jacobs said in an interview. “If the economy turns down, we want to be in a position where we can accommodate that.”