RSSCygnus Pay Cuts: Taking a BIG One for the Team
I know very little about what is going on inside Cygnus right now: all I know I read in Folio and what was written to me in an email from someone within the company. I don’t know how much money this move will save them, or how close to the abyss (not making a payment to creditors) the company was or is. Nonetheless, I will offer my opinion.
- The article, by Tony Silber and Bill Mickey, Folio’s publisher/editor and one of its most senior correspondents, respectively, quoted an anonymous source from outside the company who said:
”While busting a bank covenant is never a good thing, it is not uncommon or traumatic for private companies,” the second source said. “Bank amendments occur all the time with lenders who cooperate with management to get through difficult times. It is hard to imagine that the CEOs and/or ABRY are willing to make the company go through this trauma in order to avoid the modest costs and pain of a bank amendment.”
I give ABRY and Carr/O’Brien (Cygnus’ co-CEOs) a bit more credit than that. They are not business neophytes. Theay know how borrowing goes, and ABRY has considerable experience living on the edge with Penton. This unusual move is not one that they would make without considering other options, including the initial steps towards bankruptcy.
- The one bit of information that my secret source within the company gave me that wasn’t in the Folio article was that the managers of the company had supposedly agreed to take a 25% “or more” pay cut. I’m not sure how this part of the deal is being structured, but I do not think that a 25% or even 35% pay cut by very senior management is comparable to a 7.5% cut for the rank and file. Let’s engage in a thought experiment….
Let’s assume that the average salary of the grunts, we’ll call them, is $60,000, which translates to $40,000 after taxes (let’s not argue here about how much people pay in taxes, and what an average employee gets). If we just roughly take away 7.5% from that $40,000, that lowers the amount of money available to $37,000. Rent, car payments, insurance, credit card bills, college loans, medical bills, not to mention entertainment: you try paying for that on $37,000. I’m sure many of you are–it’s not easy. It’s not easy on $40,000.
Now consider the executive salary. Let’s assume that “senior” executives average a take of $250,000 a year. This is purely hypothetical, again, and in an age when CEO salaries amount to hundreds of times the compensations of the workers that support those salaries, this is probably conservative. Take away a bit less than half of that salary (not calculating, of course, for the tax breaks the rich are able to accrue by giving away already-paid-for items that are very valuable as charity and by hiring personal accountants), and you’re left with $140,000. Now take away 30% of that, and you’re left with $98,000. That’s a pretty hefty pay cut, but I dare say those guys can probably still afford to eat; perhaps not at the same restaurants–but try complaining about that to your employees…I dare you. It’s my guess that the more highly compensated employees also have much more a cushion: a stock portfolio, savings, and valuable assets that can be turned into cash. They can downgrade from leasing the new Lexus every two years to waiting an additional year to get one. When you drive a Honda Civic from 2001, what can you downgrade to?
The fact is, a small pay cut for the poor can do a lot more damage than a huge pay cut to the more amply compensated.
It would be hard to argue that the company’s problems are the fault of one or two individual employees. It’s an easier argument to make if that employee is a senior one. If you’re a CEO, and you’re going to hold your comapany’s most precious resource financially accountable for losses, I think it’s incumbent upon you to take the lead, a big lead, when cutting salaries. Also, if cutting salaries amounts to the dual statement “we all need to take one for the team and we need work harder/smarter/faster/more efficiently,” then cutting the rank and file salaries only sends half of this message (the first half). What can a lowly editor do to add seriously to the bottom line? Not much. But if managers have their money taken from them, they can take hard looks at what they do and spend extra time doing it better: making that extra sales call; cutting a few wasteful items from the budget; curtailing their personal business expenses; maybe replacing a legacy employee that’s no longer cutting it with someone cheaper and possibly better. While lower lever employees may only become angry at management for the cut, managers will “get the message” and change their behavior.
Here’s a question, what would Mike Bloomberg do if given the choice between lowering the compensation of the employees at his entire company by .5%, or taking a massive personal pay cut? He may not be the best example being independently exceedingly wealthy, I’ll admit, but I think his actions here would be instructive nonetheless.
Loading ...
There is a big difference between missing bank covenants or being under revenue budget and bankruptcy….come on.
You don’t think that a 25% or 35% pay cut is significant for management? Seriously?
These guys have mortgages, car payments, school costs for their kids, etc. Imagine having 1/3 or your pay suddenly and unexpectedly disappear.
Responding to the first comment: I don’t know exactly why they have decided to make this move, which to clarify, only cuts salaries by 7.5%, etc, for the rest of the year. But I didn’t want to say that they are in danger of going bankrupt when I really don’t know. I should have been either more specific about my uncertainty, or just left out the possible reasons all together.
Responding to the second one: I’m not saying that a 30% pay cut is nothing. And I know these guys have expenses, including things that cannot be cut: kids, food, insurance, etc. But wealthier people’s total expenses often include far more than the bare necessities, as opposed to less wealthy people.
For instance, take me. If I got a significant pay cut, here are the expenses I could look at trimming to save money:
- Internet
- Food
- Rent
- Entertainment (eating out, movies, drinks, other activities)
I live a fairly spartan lifestyle, so these make up the bulk of my expenses. Internet would be fairly easy to cut out (about $40 a month), and I could probably save money easily on both food and entertainment if I tried, but what would that leave me in terms of quality of life?
Now, let’s take the average wealthier senior manager with a family…and I won’t try to list everything they pay for, but just the first bunch that come to mind:
- Kids (food, clothes, tuition, entertainment)
- Mortgage
- Car payments
- Insurance (car, home owners, life, etc.)
- Gas
- Food
- Entertainment (Internet, cable, movies for self and family)
- Vacations
- Religious organization dues
- Social organization dues
- Clothing (I’m assuming here that most senior managers spend more money on than I do based on an informal survey here at the office)
- Lawyer, accountant, and other professional services fees
Now, there’s a lot of fat here that can be trimmed. In VERY difficult financial times, I would:
- Refinance my mortgage
- Downgrade my car to a cheaper, more fuel-efficient car
- Eat out less and cook more (again, assuming they eat out more than I do)
- Cut out the vacations
- Downgrade or eliminate official status at social and religious organizations
- Buy less new clothing
- Also, wealthier people are far more likely, again, to have savings and other assets (stock portfolio, investments) to fall back on.
These measure don’t include all expenses, but also don’t include all options for dealing with them. I understand that these are serious quality of life issues, but the move is going from very high quality of life to lower quality of life, v. relatively low quality of life to even lower quality of life.
And don’t think that I’m being too callous here. I know nobody wants to give up significant chunks of their income, regardless of how much they make. These are tough times for the company, and everyone has to tighten their belts–some belts are pretty damn tight as it is, and others have more wiggle room.
Your estimated wages are off, it is more like $25-30K gross for an average wage at Cygnus in a support staff position (assitants, circulation, graphics). A sales person w/out commission is more at a $40-60K.
The point here is that for those making $30K gross, that 7.5% over the course of the next 2/3 months is going to have an affect on quality of life.
This is very similar to what Primedia did in 2001. They cut many employees’ pay and had a two year salary freeze. You know things are bad when you are taking moves out of Primedia’s playbook. Cygnus folks, hang in there.
I like thought experiments. So did Einstein.
If a company is in trouble, did I as a lower-level employee do something wrong? What could it be? Did I not write in a concise manner?
If a company is in trouble, did I as a senior manager or senior executive do something wrong? What could it be? Did my decisions negatvely affect the profit level of the company? Do I blame that on the economy or the market my publication is in? Or did I misinterpret that environment?
It’s typically the fault of management. So often they just don’t know what to do. One big guessing game. The rest of us suffer more for their mistakes.