Last updated: December 18, 2008 9:08 pm

FedEx wage cuts

There is good and bad news. You may keep your job but you will be paid less to do it. FedEx took pay restraint far beyond Wall Street boardrooms on Thursday, pledging salary cuts for top brass including a 20 per cent reduction for Frederick Smith, its forthright founder and chief executive. That pain will also be shared by 36,000 US salaried staff, or about 16 per cent of its US workers, who will see a permanent 5 per cent cut, loss of bonuses in 2009 and no company contributions to 401k retirement savings. Those measures, affecting managerial jobs rather than those paid by the hour, should save about $800m through to May 2010. One aim is to limit job losses.

The stickiness of nominal wages during downturns has long perplexed economists. Indeed, FedEx’s rather unusual move may be helped partly by the fact it has low levels of unionised staff. Elsewhere, the usual modus operandi is to cut jobs while also freezing salaries. Those left behind are then supposedly grateful to have dodged the axe, although rising prices over time still help to reduce the real wage bill. Workers do suffer but without the psychological hit of a cut to their nominal salaries.

FedEx’s approach, therefore, has a certain brute honesty about it. Of course, it relies on a dire labour market so that dissatisfied FedEx workers find few openings elsewhere (or, alternatively, on a bet that their loyalty prevails). But in an environment of falling prices, where workers’ real spending power is rising in relative terms, companies should be able to cut wages rather than slash headcount. That trade-off will become more prevalent outside head offices, with UK unions already considering pay cuts to maintain employment at JCB and Corus. Intransigent US unions take note – pay-cheque pain will not just be for fat cats in 2009.

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