December 19, 2008 / 9:25 PM / 10 years ago

FedEx delivers ominous new twist with benefit cuts

CHICAGO (Reuters) - Federal Express Corp’s decision this week to force its salaried workers to take at least a 5 percent pay cut and to suspend its 401(k) match isn’t just bad news for the shipping giant’s employees.

A Federal Express truck goes out on deliveries from a FEDEX station in Los Angeles, Calfiornia June 18, 2008. REUTERS/Fred Prouser

Experts say the takebacks are an ominous sign of things to come at many other U.S. companies as businesses — even healthy ones like FedEx — adopt defensive corporate crouches in response to the worst economic downturn in decades.

The moves also underscore how much the tables have turned on U.S. workers as a result of the economic crisis, which has put employers firmly back in the driver’s seat.

According to the employment consulting firm Watson Wyatt, 11 percent of all the companies it recently surveyed either already had cut wages or planned to do so over the next 12 months.

And 10 percent either have reduced their employer 401(k) match or planned to do so.

“There’s some real opportunism operating here,” said Lawrence Mishel, president of the labor-oriented Economic Policy Institute.

“The companies are counting on the fact that people will be scared and won’t resist. I mean in this environment, who wants to quit and look for another job?”


Salary cuts are normally considered a last-resort nuclear option when it comes to corporate cost-cutting measures. Companies are typically loath to roll back wages because of the devastating effect such moves have on employee morale.

Indeed, experts say companies would rather lay off workers than force them to take a paycut. The reason: layoffs create disgruntled ex-employees; pay cuts create disgruntled employees.

“The fact that we’ve got more than one in 10 companies saying they’ve already reduced pay or plan to do so is pretty dramatic,” said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt.

“The thing about base pay is it is the most basic, fundamental attraction and retention tool that companies have. So historically, it’s been sacrosanct.”

Sejen said the record drop in consumer prices — those prices fell in November at the fastest rate since the government started collecting the data in 1947, pulled down by a 17 percent drop in energy prices — was probably providing some cover for benefit-cutting companies.

“If the price of gas was still $4 a gallon, it might be a more difficult discussion,” she said.

But the irony is falling energy prices — U.S. crude oil prices have tumbled more than 75 percent since mid-July — are good news for FedEx and likely to bolster the company’s profitability during otherwise tough times.


FedEx is not the first U.S. company to respond to the current economic mess by cutting benefits and demanding givebacks from employees.

A host of companies, including AK Steel, General Motors Corp, Eastman Kodak Co, Dollar Thrifty Automotive Group and Frontier Airlines Holdings Inc, have asked workers to take it on the chin in one way or another in recent months, citing the downturn.

But those companies were all in serious straits. Frontier is in Chapter 11 bankruptcy. GM is teetering on the edge. Kodak, already scrambling to play catch-up in the digital photography game, now contends with the dramatic pullback in consumer spending.

“Normally when companies suspend the match, it’s because they are facing significant economic challenges,” said David Wray, the president of the Profit Sharing/401(k) Council of America, a trade group representing 1,200 companies that sponsor defined contribution plans.

FedEx is different: The company announced its takebacks on Thursday in the same breath that it reported higher profits. It said the measures would reduce expenses by $800 million by the end of its fiscal 2010 year.

Those kinds of savings mean FedEx will not be the last. Indeed, a report published on Thursday by Watson Wyatt found that 6 percent of the businesses that responded to a December survey said they planned to cut salaries in the coming year, up from 4 percent in October, and 7 percent planned to reduce their 401(k) matches, up from 4 percent in October.

“As the economic downturn has both broadened and deepened,” Sejen said, “the need to contain costs has resulted in stronger measures that that are ultimately affecting more workers.”


Wray at the Profit Sharing/401(k) Council said that so far, the 401(k) suspensions appear limited in number and confined to big-name companies such as Cushman & Wakefield, Ford Motor Co and Motorola Inc.

But because the employer match is a big incentive for employees to start saving for retirement, he worries the suspensions could discourage new hires and younger employees from planning for old age.

“Certainly if there’s no match, it’s much harder to get people to join these plans,” he said.

The good news for workers is that historically, companies that suspend their 401(k) matches in bad times turn around and reinstate them once the good times return.

But the lost matches — and the money vaporized by pay cuts — are gone for good.

“There would never be a retrospective makeup,” said Sejen at Watson Wyatt.

“If your salary is reduced by 5 percent or 10 percent for 12 months, that’s just lost income opportunity.”

Reporting by James B. Kelleher, editing by Matthew Lewis

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