HP cuts pay, benefits after poor financials

Executives to have pay cuts of 10 - 20 per cent

HP chairman and CEO Mark Hurd this week said the vendor would reduce base pay and some benefits across the company in the wake of disappointing earnings and in an attempt to stave off mass layoffs.

(Slideshow: Most notable IT layoffs of 2008)

Hurd will cut 20 per cent of his base pay while members of the Executive Council will see their base salaries reduced by 15 per cent. Other executives will experience 10 per cent reductions in base pay, and the base pay of all other exempt employees will be reduced by 5 per cent, according to Hurd's internal memo (posted online by Daily Digital).

"The math is pretty straightforward. From a productivity standpoint, you're supposed to reduce headcount on par with declining revenue. If you don't believe the environment is going to improve, you should take the bigger cut to get on front of the problems," the letter reads. "We have about 100,000 people in our product businesses, with revenue down roughly 20 per cent, and an environment that may not get any better in 2009."

That could equate to 20,000 lost jobs, Hurd continued, but instead HP opted to "stabilize our cost structure" by reducing pay and adding efficiencies such as changes to the 401(k) and share ownership plans. The company has further ideas for cutting costs as the economy continues to struggle. It has significantly reduced travel expenses along with the base pay and benefits cuts.

"I don't believe a major workforce reduction is the best thing for HP at this time," Hurd said in the letter.

As for the fiscal first quarter 2009 results, HP managed an increase in revenue, reporting Wednesday net revenue for the quarter reached US$28.8 billion, up 1 per cent compared to the same period last year. Net income was $1.9 billion, or $0.75 earnings per share, down from $2.1 billion, or $0.80 earnings per share. On a pro forma basis, which excludes certain one-time items, net income came in at $2.3 billion, the same as in the first quarter of 2008, although earnings per share rose to $0.93 from $0.86.

Yet HP only managed those numbers via its acquisition of EDS.

Revenue for that group grew 116 per cent to US$8.7 billion, and accounted for about one-third of the company's profit. HP is progressing ahead of schedule with its EDS integration plan and by the end of the first quarter had cut 9,000 of the nearly 25,000 jobs that it expected to cut as part of the deal, Hurd said.

"HP Services - as a result of EDS and TS - had a strong quarter, delivering virtually all of the local currency revenue growth and more operating profit than any other business. It's gratifying, because this performance was possible because of the hard work we've been doing to restructure those businesses," Hurd wrote to HP employees. "

When you take HP services out of the mix, it's a very different picture. ... In an environment like this, there's no margin for error and no tolerance for inaction."

Even though HP doesn't expect the economy to improve soon, it does think demand for its services will remain strong. "In many cases, the services market sometimes moves counter-cyclical to the economy," Hurd said.

Revenue from HP's Personal Systems Group, which includes computers, declined 19 per cent compared to the previous year to US$8.8 billion. Unit shipments were down 4 per cent. Desktop revenue fell 25 per cent while notebook revenue decreased 13 per cent.

Its Enterprise Storage and Servers group reported revenue down 18 per cent to US$3.9 billion compared to the same period a year earlier. The Imaging and Printing Group also declined, with revenue down 19 per cent to $6.0 billion. Within that group, printer unit shipments decreased 33 per cent as people put off buying new printers, Hurd said. Sales of printer supplies were down too.

HP Software revenue was down 7 per cent to US$878 million and HP Financial Services revenue decreased 1 per cent to US$636 million. Industry watchers say while the company is positioned for growth, it won't be an easy year even for HP.

"HP Software and Services is well position for growth, but will have to fight for every customer in the teeth of the cold sales climate," said Stuart Williams, senior analyst of the Software Business Quarterly at Technology Business Research.

The IDG News Service contributed to this report.

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