Silicon Valley's Next Big Innovation: Pay Cuts

Rather than put more people on the street, Hewlett-Packard CEO Mark Hurd is cutting salaries by 5 percent or more across the board. It's a paycheck experiment never before tried at a company this large.

Hurd himself is taking a $290,000 pay cut, or 20 percent of his salary, which would look more impressive had his pay not risen 31 percent last year. HP executives are getting their pay cut 10 percent, though they can better afford it than the economically strapped rank and file.

With Congress putting executive pay under the microscope, it's a well-timed publicity stunt. The net effect on HP's financials will be small. But it's more than just a flashy PR move: It is putting a theory touted for decades in academia into practice at an unprecedented scale.

MIT economist Martin Weitzman suggested in the 1980s that instituting pay cuts instead of layoffs could make recessions shorter and less painful. By setting base salaries lower and making pay more variable with a business's financial results, companies could avoid cutting jobs and increase workers' rewards in good times. HP is trying exactly that, with a change to its bonus plans that could make up for the pay cuts if times do well.

HP is not alone. Teamster-represented truckers at YRC recently agreed to a 10 percent paycut. AMD, a Valley-based chipmaker, has instituted "temporary" pay cuts (as opposed to HP's permanent ones).

But HP, the 14th-largest public company by revenues in the U.S., has given license to the rest of the Fortune 500 to consider the idea.

It will hardly mean an end to job losses. HP is still in the middle of a three-year, 25,000-person layoff stemming from its acquisition of EDS, a rival tech-services outfit. But it could spell a future when people are laid off because their jobs truly are redundant, not because times are, as corporate memo-writers love to say, "tough all over."

There's only one problem we see with this idea: Wall Street was famous for its highly variable pay. The bonus plan may have worked for a while, but it did not end well. The high-risk, high-reward system is thoroughly out of favor now. Are we ready to become a nation of workplace gamblers? Or will America's corporate culture face death by a thousand cuts?