Hurd's memo to HP employees on pay cuts

Updated at 4:55 p.m. PT to correct when employees first received the memo.

Though Hewlett-Packard briefly mentioned during its earnings call Wednesday that it would be reducing compensation across the board, employees got an explanation from management in a detailed memo starting that same afternoon.

Chief executive Mark Hurd sent a long memo to his employees Thursday morning detailing his decision to cut salaries and reduce benefits in order to avoid further layoffs in this recession-battered economy.

Hurd frames his decision as "pretty straightforward." He will take a 20-percent pay cut, executive council members will take 15 percent, other managers 10 percent. Exempt employees will see their pay reduced by 5 percent, and non-exempt employees by 2.5 percent. HP is also reducing its 401(k) matching for employees, who will also no longer be able to buy company stock at a discounted rate.

He tries to cheer up his troops by saying that they will still receive performance bonuses: "If the company performs well, if our individual businesses perform well and if you perform well, then you could potentially make up the difference with your bonus."

Here's the full text of the letter as obtained and posted by All Things Digital:

Today, HP announced first quarter results amid one of most difficult economic downturns that any of us has ever faced. I am proud to say that we continue to execute well in this very challenging environment.

We grew revenue 1 percent year-over-year, or 4 percent in local currency, and you need to look at these numbers a little differently this quarter. For the first time in a long time, the dollar was strengthening, so the currency conversion was actually a headwind for us. We also continued to show strong operating leverage with non-GAAP operating profit up 10 percent year-over-year. This was a solid performance, and I thank all of you for your efforts.

But really, Q1 was like a tale of two companies.

HP Services--as a result of EDS and TS--had a strong quarter, delivering virtually all of the local currency revenue growth and more operating profit than any other business. It's gratifying, because this performance was possible because of the hard work we've been doing to restructure those businesses.

When you take HP services out of the mix, it's a very different picture. PSG had revenue down 19%. ESS had revenue down 18%. IPG had revenue down 19%. In fairness, across IT and even other industries, product businesses are struggling in this economic climate. And we did gain share in key market segments. PSG and ESS gained roughly 1 and 3 points of share, respectively. In IPG, quite frankly, we still have work to do across a number of dimensions like inventory, both owned and channel inventory.

In an environment like this, there's no margin for error and no tolerance for inaction. To give you a little insight into my world, after we report our earnings, we engage in a dialogue with analysts and investors. They're going to ask what we're doing in light of the current environment to right-size these businesses.

The math is pretty straight forward. From a productivity standpoint, you're supposed to reduce headcount on par with declining revenue. If you believe the environment isn't going to improve, you should take a bigger cut to get in front of the problems. You can do the calculation, as easy as I can. We have about 100,000 people in our product businesses, with revenue down roughly 20%, and an environment that may not get any better in 2009.

I'll be asked by investors, "Where's the job action, where are you taking out this roughly, 20,000 positions?" Well, I don't want to do that. When I look at HP, I don't see a structural problem of that magnitude. There are pockets where restructuring needs to happen, and areas where actions will be taken as part of our ongoing workforce optimization process. But at a company-wide level, I don't believe a major workforce reduction is the best thing for HP at this time.

I think we are fundamentally sound, and when the economy picks up, I want HP to be strong, and to take share and to outgrow the market. I said it last quarter, 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 and we need to have the flexibility to make the right long-term investments for HP.

So we are going to take action. We have decided to further variablize our cost structure by reducing base pay and some benefits across HP. My base pay will be reduced by 20 percent. The base pay of Executive Council members will be reduced by 15 percent. The base pay of other executives will be reduced by 10 percent. The base pay of all other exempt employees will be reduced by 5 percent. For non-exempt employees, base pay will be reduced by two-and-a-half percent. Additional efficiencies, including changes to the US 401(K) plan and the share ownership plan, will also be implemented. Of course, the implementation of all of these actions is subject to compliance with local laws and regulations. Follow-up communications will detail the timing and the plans in your location.

This does not change our pay-for-performance strategy at HP. If we outperform, and there is a chance we will, then we will increase the total amount of variable pay. In fact, the financial flexibility we're gaining helps put us in a better position to compete and to win in the marketplace, and fund the bonus program this year based on pre-adjusted salaries. If the company performs well, if our individual businesses perform well and if you perform well, then you could potentially make up the difference with your bonus. I can't promise you anything, but I tell you...there is a chance...if we get this right.

To be clear, these actions don't make up for all of the decline in revenues. We're also benefiting from the tough actions we've taken over the last few years. People always asked, "Why are we so focused on getting costs out in good times?" Now...is why that work was so important. We've been able to bank some of those savings, and we're making a withdrawal, which along with the actions we're taking today, I hope, will get us through this recession.

Again, 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. But for now I believe this is the right thing for the strength of HP.

I know this is a tough time. But if we get this right, HP can be the kind of company that not only has led, but will extend its leadership. We can emerge from this recession in a powerful position to create value for our customers, our shareholders and our people for years to come.

Thank you.

Mark

[gmoney3000]

HP's year-over-year profit is "up 10%", and yet they are cutting salaries and canceling other benefits? Are you kidding? I think a lot of companies are using the "economic crisis" as an excuse to extract concessions from a scared workforce, nothing more. There's no other explanation.

Hope they have the furniture locked down. If I was there, I'd be finding other ways to compensate myself.

[gggg sssss]

this is how the auto makers should work - dont close plants, dont lay off people - just cut the salleries to the level needed to survive. Better working at 80% rather than unemployed at 0%

F the UAW

[john55440]

F GM's management.

An MBA instructor I had once pointed out that "Management gets the unions that they deserve."

[cadetvet]

Cheers to Mr. Hurd for taking a far more humane approach to this economy than many other companies have taken. I trust that HP will be rewarded for the loyalty shown by its management to its employees. More companies need to be this intelligent when it comes to slowdowns.

Now we can just hope that GM/Chrysler have the same insights. If I were them, I'd go to the bargaining table after making sizable reductions in their management's salaries. Then they may have some credibility.

[john55440]

At least HP's CEO cut his own pay. It seems that most CEOs announce massive layoffs, and then give themselves huge bonuses.

[Hardly_Paid]

Now you know what HP really stands for if you?re one of the serfs? ?Hardly Pays?.

The real story should be ?HP Invents? Time Machine!? My hourly rate, at least, keeps going back farther and farther in time. Of course I also had the misfortune of working for the company Hurd previously cannibalized, NCR. Talk about bad luck.

If you think Hurd is being noble with his own cut, look a little more closely at the numbers. His $1.5M salary is being cut by 20%, not his $42.5M total compensation. I don't think he will have to cut back on groceries.

[sparrow1231]

Apparently the leadership of even the world's most reputable IT company, can appear so zealous in front of its shareholders & american public, yet destroy the very fabric of what made it the giant it is. Its kinda weird to me how employees allow executives tell them they are $42M more valuable to the organization then the contributions of those who also perfom at high level at their respective jobs. Although its slighly worse than that. In fact HPs CEO thinks his employees are actually 5% less valuable today, then they were yesterday. I wouldn't be surprised to see him get rid of every last employee in the company at the end of the year to justify his own existence.

Imagine what those poor employees must feel like to know their CEO can use the economic downturn as an excuse to fuel his cost cutting fire & retirement futures to only bolster his own metrics. Terrible leadership: sell, sell, sell.

- Slasher

[gigabytemike]

As a recent former employee I am not surprised by the Hurd move at all. He has been cutting and eliminating benefits since he arrived. 12 months ago when I left, the HP benefit package was WORSE than many small companies that have only a few hundreds employees. Hurd doesn't give a dam about the employees. He only cares about stock price of which his whole compensation is based. He did the same at NCR. This is what corporate america has become so get used to it.
My advice to all HP employess.... GET OUT ASAP. Your future at HP is doomed and you have very little value in HP's eyes. There is life beyond HP and you know what?...its pretty darn good.

[wcrosby]

It is very clearly a way to see how far you can push the workers before they push back.

[tketcher]

One thing nobody mentioned was that this Pay Cut ONLY APPLIES TO AMERICAN Employees. And Everybody knows American are vastly overpaid right? Since Y2K companies have been systematically trying to eliminate every IT job in the States. And Its working for them.