HP to cut salaries as profits decline; CEO takes hit, too

Hurd to take 20% pay cut as Hewlett-Packard looks to lower costs after weak Q1

Hewlett-Packard Co. has cut about 9,000 employees so far as part of the planned layoff of nearly 25,000 workers that it announced in October. Now HP is reducing salaries and cutting back on travel in an effort to avoid being further wounded by the sharp knife of the economic recession.

On Wednesday, HP reported a 13% decline in earnings for its fiscal first quarter, which ended Jan. 31. Net income totaled $1.854 billion in the quarter, down from $2.133 billion in the same period a year ago. Revenue grew just 1% year over year, to $28.8 billion, and HP said it expects business to decline by 2% to 3% in the current second quarter.

The ongoing layoffs announced by HP last fall followed its $13.9 billion acquisition of Electronic Data Systems Corp. in August. Instead of making more job cuts now, HP CEO Mark Hurd said during a briefing on the Q1 results yesterday that the company is cutting salaries, "significantly reducing travel" and eliminating or lowering various types of discretionary spending.

Hurd himself will take a 20% cut on his $1.45 million base salary, for a reduction of about $290,000. But stock awards and bonuses helped to increase his total compensation to more than $42 million last year, according to a filing that HP submitted to the U.S. Securities and Exchange Commission.

HP said in a statement issued after the Q1 briefing that the base pay of other members of its executive council will be cut by 15% and that oher executives will take 10% salary cuts. The base pay of exempt employees — typically defined as salaried workers — will be reduced by 5%, and nonexempt -- i.e., hourly -- employees will have a 2.5% reduction.

HP also said that it will cap matching contributions to workers under its 401(k) plan at a maximum of 4% of eligible employee contributions.

"As well as the company has done over the last few quarters, I think yesterday came as something of a shock," said Charles King, an analyst at Pund-IT Inc. in Hayward, Calif. "I don't think any vendor can expect to escape the systemic bad news. It was bound to catch up [to HP] eventually."

Like other hardware vendors, such as IBM, HP reported lower sales across its hardware lines as both businesses and consumers held back on purchases over the past few months. PCs, servers, storage equipment, and printing and imaging products were all affected, HP said.

For instance, enterprise storage and server revenue during the first quarter was $3.9 billion, down 18% year over year. But there was a small silver lining: Blade server revenue increased 4%, according to HP.

The decision to institute pay cuts across the company may indicate that Hurd thinks HP "has reached the end — at least for the time being — of what they can accomplish financially with layoffs," King said. "But you never know what could happen if things go even further south."

Rob Enderle, an analyst at Enderle Group in San Jose, said salary cuts "can typically do a lot of really ugly things to productivity — except when you're in a market like this one, where everybody is even more afraid of losing their jobs." In the current economic climate, he added, "you can make a [salary] reduction and get away with it."

More layoffs may not be a good option for HP, according to Enderle. "When you're already running fairly lean," he asked, "who do you lay off without creating even bigger long-term problems?"

The only real bright spot for HP during the first quarter was in its services business, which generated $1.1 billion in profits. HP said its integration of EDS is ahead of plan.

Copyright © 2009 IDG Communications, Inc.

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