Cut pay, not jobs

In the wake of the Sept. 11 terrorist attacks, there is a spirit of collective unity in the air - except, that is, in the business world.

This lack of community spirit is most notably true in the airline industry, which, between the airlines themselves and the Boeing Corp., has announced layoffs of 130,000 workers since last month's tragedy. But layoffs are only one way to cut labor costs. Another is to cut pay.

Pay cuts don't produce increased government expenditures for unemployment benefits. Moreover, pay cuts need not be permanent and need not prevent later decisions to cut jobs. Of course, layoffs were proceeding apace for several months before Sept. 11, as company after company sought to reduce labor costs in response to shrinking customer demand and profits. Those pre-Sept. 11 layoffs largely accounted for the increase in unemployment from about 4 percent to roughly 5 percent over the past year. Unemployment now threatens to reach 6 percent or more by the end of the year.

Why do US executives seem to favor job-cutting over pay-cutting? Perhaps they worry that pay cuts will dampen employee motivation or spur their most talented employees to go elsewhere. Perhaps they believe job cuts provide especially positive signals to investors and financial analysts. Perhaps they wonder if there will be enough work left for a fully retained workforce.

While each explanation has some merit, an alternative is that US executives are mired in so-called "path dependence." That is, at some point in the distant past, an action was taken that seemed appropriate for dealing with a specific issue. Especially when it was successful, the same action came to be repeated from time to time, eventually forming a regularly used, highly dependable path.

Employee layoffs were first used on a large scale by US manufacturing companies during the mid-19th century, and later became prevalent in auto, steel, and other heavy industries. Most of those layoffs involved unionized workers with layoff rights who were recalled to work when the economy turned around. This layoff-recall cycle was repeated many times during the last half of the 20th century.

Today, our new collective spirit gives executives a clear opportunity to get off their layoff path and show that their organizations can prevail in difficult times.

Airline executives in particular should rescind their layoffs, which reflect no strategic thinking or leadership whatsoever. They can start by substituting 20 percent pay reductions for 20 percent layoffs; the pay reductions can be revisited every few months.

Even better, especially in light of a government bailout plan, which provides no relief for laid-off airline employees but treats executives' pay as sacrosanct, airline executives could adopt a tiered approach to pay-cutting in which employees' pay is cut 15 percent, managers' pay is cut 25 percent, and executive pay is cut 40 percent.

If there isn't enough regular work for retained airline employees, they can be used to develop new safety, security, and antiterrorist practices - perhaps with a government subsidy. More broadly, it's time for executives in air transportation and other industries to show leadership, instead of mindless herd-following, by "flexing" pay rather than jobs.

David Lewin is the Neil Jacoby Professor of Management, Human Resources, and Organizational Behavior in the Anderson Graduate School of Management at UCLA.

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