Special Financial Report: Employee Compensation

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To put the new plan into action, Chadha called the members of his sales team together, gave them each a copy of the book, and explained his goal: to minimize discounts. The four salespeople seemed to understand immediately. Next, Chadha bundled the firm's 25 products into combinations designed to make it easier for salespeople to offer suites of products without having to haggle over the price of each component individually.

Chadha's team closed eight deals in the first quarter of the year, on a par with the past few years. Margins, however, were up nearly 9 percent, because discounts nearly disappeared. At the same time, Dave Shockey, who heads the firm's business development, says his commissions are up nearly 25 percent under the new structure. "I was able to turn the tables on my sales team and got them thinking the way I do," says Chadha.

Conditions change in a hurry. Don't be afraid to do the same in response

On a list of recession-proof businesses, Gotham Dream Cars would have to rank near the bottom. The New York City—based company rents luxury sports cars, including Ferraris and Lamborghinis, to highfliers in Manhattan and Miami for $2,000 to $13,000 a week. Until the fourth quarter of last year, business was on track for a record year. "Then everything fell apart," says Noah Lehmann-Haupt, the founder and CEO.

Revenue plunged 30 percent, prompting Lehmann-Haupt to slash prices by nearly the same amount. In January, scrambling to keep the business from falling too far into the red, he slashed his salary 40 percent and the pay of his nine employees up to 20 percent. He held his breath and waited to see what would happen.

But what happened wasn't what he expected. Almost as soon as Lehmann-Haupt cut prices, the volume of rentals skyrocketed. Revenue in the first quarter may have been down 8 percent from 2008, but rental activity, spurred by word of mouth and e-mail marketing, jumped some 15 percent.

It was great news, but it presented a problem: Lehmann-Haupt's employees, who after the cuts earned an average of about $60,000 a year, were now working harder to pick up, drop off, clean, and maintain his fleet of 18 vehicles. Only now, they were making 20 percent less. Three months after the cut, three of his most senior employees marched into the boss's office and issued an ultimatum: "We know revenues are down," they told him, "but we're working just as hard -- in fact, even harder -- and we need to be compensated." And if Lehmann-Haupt balked? "We're giving you our two-week notices," they said.

After his employees left his office, Lehmann-Haupt pondered his options. On the one hand, revenue was down -- and probably would remain that way for some time. Lehmann-Haupt was aware that his people were working hard, but he also knew that replacements wouldn't be too hard to find. Maybe, he thought, he should call his employees' bluff. But then he considered the hassle and cost of hiring and training. What's more, the job also requires people to be on call seven days a week, often until midnight. Lehmann-Haupt wondered how easy it would be to find new employees willing to put in that kind of effort.

Lehmann-Haupt decided to restore salaries to 2008 levels. When he announced the move, cheers erupted in the office. He immediately began looking for other places to trim. He renegotiated his rent and asked for breaks from some vendors. "Given all the other challenges facing the business, I didn't even want to think about hiring replacements," Lehmann-Haupt says. But he isn't afraid to draw the line somewhere. "One guy wanted a 50 percent raise," he says. "Of course, I told him no. Even if you're the best employee ever, you can't ask for a 50 percent raise during a recession."

When hiring, be opportunistic. Scratch that: Be ruthless

Kevin Burke had a dilemma, and it needed to be addressed. Burke is CEO of Centuria, an IT services firm in Dulles, Virginia. The company, whose 110 employees work with federal agencies such as the U.S. Department of Agriculture and the State Department, has been on a roll; revenue hit some $21 million in 2008, up from $8.1 million a year earlier. Suddenly, Burke's dream of driving revenue to $250 million seemed attainable.

Burke's problem had to do with his No. 2, a partner who owned 20 percent of the company. But Burke had grown increasingly concerned that his partner wasn't the right person to manage Centuria as it entered its next phase of growth. Things reached a head when the company's recruiter handed Burke the resumé of a man named Tim Green.

As a thriving business in a troubled economy, Centuria had been flooded with resumés. But this one stood out. On paper, Green looked perfect -- a West Point graduate with an M.B.A., a proven knack for landing big contracts, and a record of helping take small companies to the $100 million level. What's more, Green was willing to accept the same base salary as the current second in command.

Burke's instinct was to make the hire. But was he truly prepared to dismiss his partner? "I worried that everyone in the company would start asking themselves, 'Am I next?' " he says. Still, he wasn't going to miss this opportunity. So in March, Burke broke the news to his partner. He agreed to step aside, and the two began negotiating the terms of his exit.

Burke's next step was to explain the move -- and control any effect it might have on morale. After introducing Green to employees in Dulles, Burke took him on the road for meetings with employees at the sites of six projects in nine states. Green was quickly accepted as part of the Centuria team. If fact, the change went so smoothly that Burke began looking for other places in the business that might benefit from new blood. "I decided," he says, "to upgrade all of my B-level players to A-level players."

He asked Green to evaluate the performance of every Centuria employee. If someone was not up to snuff, the company began looking for someone who would be. In one case, a project manager for a key account seemed to be in over his head. The company quickly found a more seasoned candidate who was willing to take the position for a smaller salary, but more upside if she succeeded. Again, Burke made the switch -- though this time, he moved the former project manager into a more appropriate position.

Burke remains on the lookout for more opportunities. After all, labor markets like this don't come around too often, he says. And managed correctly, such moves, however disruptive, don't have to drag the company down, according to Kate Wolf, the company's HR director. "When we replace the B players, it actually elevates morale," she says. "They're not dragging down the average anymore."

Darren Dahl is a contributing editor.

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