FedEx Makes a Smarter Kind of Cut
By PETER EAVIS
FedEx may not look like the kindest company after announcing wage cuts Thursday. But the move could turn out to be one of the smartest corporate responses to the recession -- and may become widely mimicked.
If executed well, cuts in wages could even help the economy out of recession, not to mention benefiting the shareholders in the companies that do them.
In response to terrible shipping trends, FedEx said next year senior execs would have salaries pruned by 7.5%-10%, while other salaried employees would face a 5% reduction. Hourly workers aren't included in these cuts.
From an economic perspective, targeting salaries makes sense at FedEx. Wages and benefits are the largest single operating expense by far -- and are typically equivalent to just over a third of revenue.
Why might this approach work?
It could help avoid the disruptive and expensive process of firing lots of workers in a trough -- and the added cost of rehiring them when the recovery occurs. FedEx's decision to cut pay for its better-paid employees might also give management credibility to ask for cuts elsewhere if the recession drags on.
The macroeconomic benefit from cutting wages comes from three sources. First, if it does indeed lead to fewer layoffs, aggregate consumption may take less of a hit. Second, banks could face lower losses from debt defaults. Third, one of the good things about recessions is that they can bring certain prices down to sustainable levels, setting the foundation for an economic bounce back. It makes little sense for wages to be exempt from that adjustment.
"The faster you get prices, including the cost of labor, to equilibrate, the faster you can get on with the recovery," says Paul Kasriel, director of economic research at Northern Trust.
The risk is that wage cuts stoke labor discontent and lead to production disruptions in a time of economic weakness. The threat of a weak economy may not be a deterrent to industrial action. After all, it didn't deter strikes over the past 18 months at Boeing and American Axle.
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