The Unkindest Cut of All
How one company's founders have gone about cutting their own pay to help their business stay afloat.
Published January 2002
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How one company's founders have sliced their pay to keep their business afloat.
"The truth is, I think we've done a pretty great job just surviving, given current conditions," says Jim Reiss Jr., the CEO and cofounder of Coollogic Inc., a Dallas company that provides software for Internet appliances and network devices.
The company that Reiss and Rob Wood, Coollogic's president, founded in 1997 is dramatically different from what it was during the technology industry's peak nearly two years ago. Then it had about 1,200 angel investors and saw an initial public offering just months away. "We were in great shape -- 100% debt-free," says Reiss. But when the IPO market collapsed, the partners realized that they wouldn't be able to go to the public market to raise the funds that they needed to manufacture Internet appliances.
In late summer a less-than-enthusiastic response from the private-equity markets led to a major overhaul of Coollogic that included its concentrating only on software, which is less capital-intensive than hardware. Coollogic now employs 12 people, down from as many as 40 at its height. "It's not too surprising that when you're in the midst of a major tune-up of your business, you're going to take a pretty hard look at owner and management compensation along the way," Reiss says.
Until the market downturn Reiss and Wood relied on a common technique to set their own paychecks: they bought research from their accounting firm and other reliable sources that showed the amount that top officers were earning at companies of similar size in their industry. And they paid themselves accordingly. The technique still has its advantages, mainly as a defense tool during IRS audits of executive compensation. But although accountants and other compensation experts still recommend that approach, it's useless in a business climate as risky and unpredictable as the one we're in.
SHRINKING PAYCHECKS: "It's the price you pay for being a founder. The cook always eats last," says Jim Reiss, CEO of Coollogic.
At companies like Coollogic, executives are rethinking their paychecks according to three key issues: the state of their companies, the economic realities on both the U.S. and global horizons, and the condition of the financial markets. When the monitors all point downward, no independent data can convince those executives that generous compensation packages make business sense.
So Reiss and Wood did what they had to do. "Our leadership team is off 45% from last year's compensation, and to be perfectly honest, I'm not even sure that it's going to end there. But we're at the point where the most important thing to us is doing what it takes to keep this company alive," Reiss says.
It can be difficult for an executive to figure out how much and when to cut, especially when economic conditions continue to deteriorate. By mutual agreement, Reiss, Wood, and one other top executive at Coollogic started out by deferring a major portion of their compensation. (See "Another Reason to Defer," below.) The deferrals showed up as a liability on Coollogic's balance sheet, negatively affecting the company's financial position. To maintain a healthy balance sheet, Coollogic's executives waived the deferrals and cut their pay.
For that trio, and for other managers struggling to quantify executive-pay cuts, there's no single financial result or trend that can dictate their actions. For businesses that are watching their profit margins slip, the best strategy is usually to calculate the potential impact of a range of compensation and other overhead-cost cuts on bottom-line projections. In Coollogic's case, since the company was still working toward profitability, the challenge was to reduce all expenditures, including payroll, to conserve working capital at a time when financing options were drying up.
But how far down the corporate ladder should top management push salary cuts? Coollogic's founders approached that as a management rather than a financial issue: they avoided cutting salaries for the next tier down, department heads, mainly because they viewed those employees as both valuable and likely to leave the company if they were hit in their pocketbooks. The pair also chose not to impose companywide reductions. "I'd rather cut bodies and add workload to the remaining crew," Reiss says, "than shear everyone and demoralize the whole crowd."
The two founders went out of their way to explain to staffers that the preservation of their paychecks had come with a cost: the layoff of more than half the staff. Reiss says, "We told them up front, 'This is going to be tough. You'd better be ready to work your asses off.'" Reiss and Wood know that their pay sacrifices haven't earned them any brownie points. Says Reiss, "Employees expect that. It's the price you pay for being a founder. The cook always eats last."
