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To be sure, variable pay is not a cure-all for unemployment, as last week's grim layoff announcements made clear. General Electric said it would lay off as many as 4,000 workers at its aircraft-engines division, Corning added an extra 4,000 to the mix, and Sun Microsystems said it would have to ax close to 4,000 of its own. Nearly 250,000 layoffs were announced last month, bringing the total for the first nine months of 2001 to 1.37 million, according to the outplacement firm Challenger, Gray & Christmas. Though the unemployment rate stayed flat at 4.9% in September, the bulk of the damage, including more than 100,000 layoffs announced in the airline and aerospace industries, hasn't yet taken its toll.
The buffering effect of bonuses has grown steadily in recent years--an estimated 5% to 10% of all workers have access to some kind of variable pay. About 60% of middle managers making $60,000 to $100,000 are eligible for bonuses, up from 40% a decade ago, according to Watson Wyatt. Among companies with more than 500 employees, roughly 40% of all workers get some kind of variable pay, estimates compensation consultant Towers Perrin.
They may not elicit much sympathy on Main Street, but no one is more affected by the bonus economy than the people on Wall Street. Year-end bonuses, which account for as much as 90% of annual compensation of investment bankers, could fall as much as 70% this year. With initial public offerings, mergers and acquisitions and other staples of the business slowed to a crawl, many bankers can kiss their new BMW or Connecticut country home goodbye. A number of lawyers and other professionals are in similar straits. "We share the gain, but we also share the pain," says Tower Snow, 53, chairman of Brobeck, Phleger & Harrison, a major Silicon Valley law firm, which will grant bonuses to fewer than 100 of its 650 associates this year and won't hand out any of the $1,500 bonuses typically given to non-attorneys.
Like bonuses, stock options in recent years have spread far beyond the top executive ranks. But with share prices down, many options are now worthless. "Employees already have a lot of underwater options. To rub it in with even lower-priced grants doesn't help much," says Diane Gherson, principal and head of employee-pay consulting service at Towers Perrin.
Instead of concentrating the pain of cost cutting on a bunch of unlucky souls through layoffs, many companies are distributing it more equitably. "Employees look at this as another time when they are effectively investing in the company's future," says Kenneth Goldman, chief financial officer for Siebel Systems, a software maker based in San Mateo, Calif., that eliminated most bonuses this year. Still, that sense of solidarity goes only so far. With the best people still in great demand and ready to jump ship at a better offer, businesses will probably find a very selective (and quiet) way to give out some rewards.