Possible Positive Side Effects out of Cygnus Pay Cuts

For the employees, this title really does not apply.  Let’s face it, if Cygnus does come out of this and has a blowout 2008, are the low-level employees going to really benefit all that much?  Probably not.  So let’s fly a little higher right now, and try to see the bright side of the across-the-board pay cuts.

When Cygnus made its budget for the year, the company projected a certain amount of growth for print, online, and events.  The bank covenants that were made were based on that growth.  Despite online’s overperformance (budgeted for about 50% growth, and will be growing about 60%), and events’ overperformance (budgeted for about 9% growth and realized about 11%), Cygnus wasn’t able to match its growth forecasts from the beginning of the year.  Print was set to grow 4-5%, and it remained flat.  Money was also slated to come in from big agency accounts cultivated by Carr Davis and other salespeople.  That money isn’t coming in as expected either.

So, what could be done to maintain bank covenants?  Layoffs, asset sales, reworking covenants, and pay cuts.  As we all know, the last option was chosen.  Here’s why it might be good for the company:

Next year, when the bank covenents have to be rewritten based on the new budgets, Cygnus is showing its creditors that it has done several things this year:

- The company will end up growing about 5%.  Though that is far below the projected 11%, and far below the required amount in the covenants, it still is growth in a very challenged market.

- When the company was unable to keep its covenent due to unforseen problems, what did it do?  Did it default?  Did it cut staff and therefore weaken its business?  Did it ask the banks for more money or concessions?  No.  The company just made it happen.  It did whatever it took to make sure that its financial house was in order, even if it did mean some painful sacrifices from the top on down.

You might fault Davis and Tony O’Brien for what they have decided to do (especially if you’re an affected party), but, you also have to admit that it was not a decision without merits.  I would also add to that that it was not an easy decision for anyone.  A lot of people look at moves that CEOs make and say that they may have done something differently; the situation always looks different from the balcony–it’s a lot hotter, and the lights are alot brighter on stage.