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Downsizing: Limbo Lower Now

Companies are still seeking ways to reduce overhead; after two years of cost-cutting, it's a tough task. Plus: pulling the plug on exorbitant pay.

1Feb

Corporate managers thought that recent cost cuts would push their companies out of the doldrums -- or at least boost earnings enough to please shareholders. That hasn't happened. Is another round of cuts in order?

Lawrence Serven, a principal at ButtonwoodLLP.com, a Stamford, Connecticut-based management-consulting firm, doesn't think so. "Two years ago, there was plenty of fat for CFOs to cut, but now [companies] are pretty much down to the bone," he says. Serven insists that companies that make cuts blindly could do more harm than good. "It's a mistake to make across-the-board cuts when you don't know where the efficiencies will come from." He expects a renewed focus on process-improvement techniques, such as the reengineering practices that were popular in the mid-1990s, to replace deep cost-cutting.

Some companies are hoping that past cuts will start to pay off this year. LuAnn Hanson, CFO at Ramtron International Corp., says cutting almost 5 percent of costs at the $47 million semiconductor company in the past two years will make future budgets easier to handle. "We've figured out during the last few years how to do more with less," she says. Hanson expects only normal attrition for 2003.

Kevin Gregory, CFO at $424 million information-and-content provider ProQuest Co., says additional cost-cutting was abandoned, not because it wasn't needed, but because it couldn't be done. "A lot of costs were taken out already. If you get any more downsizing, you're not going to be in a position to react when the economy turns around," he cautions.

Companies that are continuing to cut costs are focusing on the little things. For example, Agilent Technologies Inc., in Palo Alto, Calif., recently prohibited employees from relocating their desks, which can cost up to $200 in service fees.

Serven adds that companies would do well to pay more attention to budgeting and planning to avoid cutting too much. "If you know where you want to be, you can figure out what you need to get there," he says.

Pulling the Plug on Exorbitant Pay

David FitzPatrick might be a tad nervous these days. The new CFO of Tyco International Inc. landed a $21 million pay package just as shareholder activist groups began promising a crackdown on excessive executive pay.

In fact, during the coming proxy season, bloated executive pay will take center stage. The California Public Employees' Retirement System (Calpers), with $133 billion in assets, has promised to focus on the issue this year. Meanwhile, TIAA-CREF, the teachers' retirement fund, is readying a list of 50 top abusers. Even mutual-fund giant Fidelity Investments is reportedly considering new guidelines for executive pay.

The main driver is the excessive packages paid at such scandal-ridden companies as Enron, Tyco, and WorldCom. In addition, says Blair Jones, senior vice president at Sibson Consulting, "almost three years of mixed performance are forcing companies to take a sharp pencil" to their plans. The flaws of stock options have been particularly exposed, she says. "A power shift is taking place. Institutional investors have become more willing to put a stake in the ground [on compensation]."

One definite target is General Electric Co. In an opening salvo last October, Calpers and Amalgamated Bank of New York Inc. agreed to co-sponsor a resolution for greater use of performance-based compensation at GE. The company now requires top officers to hold stock for a year after exercising options, as well as to maintain a minimum share amount.

Peter Chingos, of Mercer Human Resource Consulting LLC, says the pressure is palpable. "We are in an environment where boards and compensation committees will not be forgiving. Executives will not be paid for effort any more. They will be paid for results."

Popping the Pay Bubble

The highest-paid CFOs from 1998 to 2001.

* Left company
1 Based on company size

Source: Bloomberg

CFOCompany

Average annual total pay

% over market norm1

Mark Swartz*Tyco International

$59,000,000

1,052%

Jeff HenleyOracle

10,800,000

281

Larry CarterCisco Systems

13,900,000

231

Scott Sullivan*WorldCom

16,500,000

179

Richard KelsonAlcoa

10,600,000

149

Michael RoseAnadarko Petroleum

4,700,000

143

David ViniarGoldman Sachs

11,400,000

117

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