All CEOs today of companies big and small are all pondering the various ways of cutting costs and thus either sustaining the profitability of their companies in the event of lower revenues going forward. CEO is used loosely here and it could very well be the COO, Managing Director, etc. Or it could be a cash of cushioning the decline in profitability. Everyone is saying that 2009 will be a bad year though different people have different degrees of bad. Everyone is saying that revenues will decline though different people have different degrees of decline. Just a disclaimer that this account is fictitious and very much a parody. But if you find it familiar, and I am sure most of you will, at least for some parts, it is merely a reflection of the times we are in.

Mr CEO tosses and turns in his bed. In his dream, he is talking to two of his inner voices. On his right shoulder is the Angel and on his left shoulder is the Devil. All three of them are engaged in an intense debate on what is the best way forward in such times. You can almost imagine Mr CEO all wrinkled up in frustration while Devil is all red and naughty with evil thoughts running through his mind and Angel looking completely wholesome and glowing with idealism and righteousness.

CEO : Sigh… I really do not know what to do. How much costs should I cut? Should I cut pay or retrench? And by how much? How bad will next year be????

Devil : Cut, cut as much as you can. In good times, cut and in bad times cut even more. Take advantage of the opportunity to cut as much as you can.

Angel : Hold on there, we have a responsibility to run the company properly. We cannot just exploit the situation and our employees. They trust us to do the right thing.

Devil : Come on sister, don’t be so naïve. First of all, times are so bad that all the employees cannot get a job outside. So now is the time to make sure that the bunch of slackers are not overpaid. A pay cut of 20% might still be overpaying them.

Angel : How can you say such a thing? Our employees trust us to do the right thing. They know that we will only cut their pay as a last resort.

Devil : Actually, that is the first resort but I shall not argue with you. We need to do what is right for ourselves, oops I mean our company.

CEO :  Ourselves? It is in our interest to cut pay? Wouldn’t my pay be cut too?

Angel : We have to share in the pain too. That is only fair.

Devil : Share the pain… Symbolically yes. But don’t forget that most of our pay is variable. And this variable portion is tied to our company’s performance and in particular profit. We need to work on not just reducing our profit targets but our costs as well. Which brings me back to we need to cut pay.

CEO : Yes I guess we have no choice, we need to cut all the costs that we can. Especially all the little little costs that add up.

Devil : So we should cancel the shuttle bus services we provide, turn off the aircon at 6, switch off computers and printers during lunchtime, cut any variable allowances and ask staff to reduce overseas calls,….

Angel : What percentage of total operating expenses are these? What is the impact of all this? We need to communicate to staff before we do anything.

Devil : Yes cut whatever is variable and spare. As long as we don’t cut our car allowances and entertainment accounts.

Angel : That’s not fair. We need to share the pain.

Devil : We still need our Mercedes and Volvos to ferry us around to our important meetings and we need to have our lunches, dinners and drinks to entertain our customers and friends. Life goes on you know.

Angel : But, but, but….

CEO : Ok ok, it is decided, we need to cut whatever expense we can. Tomorrow I will find my most trusted Manager and entrust him with this duty. He will figure out what are the easiest cost to cut with no hesitation whatsoever once I tell him the importance of cutting cost. But this pay cut thing is sticky.

Angel : We need to handle this with utmost care and wait until we are sure we cannot do anything else and the downturn is really upon us before we cut pay.

Devil : Yah yah yah…. We can start with 5% first and if that is not enough another 5% and maybe cut down to a 4 day week after that. But do the pay cut first, so when we cut 20% for the 4 day week, we cut a total of 28% rather than just 20% at the first instance…. That is a good trick…

Angel : EVIL !!! (gives Devil a firm glare) We should not exploit our staff. They are all very important to us, each and everyone of them and we need to think very clearly before we cut their pay. They also have families to feed.

Devil : Thanks for the compliment. And really, there is no such thing as an iron rice bowl these days. These young people just job hop whenever they want, no loyalty whatsoever. It is time to teach them a lesson. Cut their pay since they are overpaid and retrench those who are not performing or those we can find cheaper replacements for.

Angel : Wait a minute. We need to be careful here. If we are going to do pay cuts, then we should not do retrenchments, unless it is really dire. It should be one or the other.

Devil : Does it matter? Can you stop being so idealistic? We can call it something else instead of retrenchment. Call it corporate restructuring or redeployment. Or we can do it quietly, without too much attention.

Angel : That is downright sneaky. How can you even think of something like that?

Devil : Anything to hold up the bottomline and help the company cushion the impact of this crisis. And of course ensure that we can still meet our performance targets. Not to mention holding up the share price to maintain the value of our stock options.

CEO : Ok ok, we should have a pay cut since the outlook is not very good. I will ask my trusted Manager to dig up how much we cut during the last crisis and then aim to cut around the same amount. That should be an acceptable benchmark.

Angel : Shouldn’t we work out the likely revenue impact and the impact of the pay cut on the company’s financial performance? Wouldn’t that be a fairer way of determining the pay cut quantum?

Devil : Sounds like we can manipulate the figure to be more than the last time. Finally, something that we can agree on.

Angel : Hey, I am not agreeing with you. Just want to ensure that there is proper communication and accountability to all the staff. We cannot just cut pay or retrench staff just at the snap of our fingers. That is very bad management.

CEO : Well we shall just have to explain to the Staff once we have decided on the amount to cut pay. Or should we do retrenchments?

Angel : Pay cuts are for all the staff to undertake so that everyone keeps his or her job. This is good for overall morale but in truth it hurts the top performers. The top performers will benefit more from a retrenchment exercise as they can still be relatively rewarded. We need to weigh the pros and cons carefully.

Devil : No need to weigh… Just do both. First cut pay for all, then do retrenchment on the side. Just be sure not to call it retrenchment. That way, we cut quite a bit of expenses and we get to lose the drift wood and non-performers.

Angel : I cannot repeat myself enough, we need to be careful here. We should communicate this properly to our staff and not do things on the side. We need to ensure that overall morale is still good. And it is always questionable about the non-performers. Whose perspective should it be from?

Devil : So many concerns and constraints, sister… Just ask each department head to axe a certain percentage of their staff. And if they don’t come out with the list of names, then we send in someone to produce the names for them.

CEO : Sigh…. All the employees are like my children. I treat them equally and need to take care of all of them. I do not like to show favourtism to anyone of them. So really, do we need to cut costs. Are things really that bad?

Devil : It doesn’t hurt. If all other companies cut cost and cut their budget, we will stick out like a sore thumb and the Board of Directors will not be happy with that and the worse performance. If we cut, even if performance is bad, at least we have done what we can.

Angel : Sigh… If everyone thinks like that, we will engineer a recession just on the sum of all these costs cutting….

CEO : Well, we must do what we need to do. My mind is decided. We shall cut cost to be prudent and do the right thing.

Devil : All that nagging paid off… Can’t wait for all the cost cutting measures to kick in as well as get rid of both those young slackers and overpaid old foggies, especially those who show us no respect.

Angel : Must remember to communicate properly, and work out everything fairly and openly. We should not hide things…. Sigh….

As you can tell from the exchange, the CEO’s job, or whoever it is that cuts cost, is not an enviable one. There are no right answers and it is impossible to please everyone. Communication and accountability are important, but it is in truth a thankless job. It is not easy to carry out such an exercise with dignity and respect for employees, but that is part of the "perk" of the job. How the CEO executes the exercise will determine how the employees, surviving or retrenched, remember and respect him going forward.

Economic cycles are part and parcel of life. What goes up must come down. What goes down must come up. Of course the sum of all our behaviors affects the economy. So even if there is no recession to begin with, and all CEOs believe there is one and start downsizing and cutting costs, then we will get a recession. Whether or not we can prevent the herd from expressing their fear is one thing and while seeing it in that light will not make the bad news more palatable, it should hopefully give us a better sense of the months ahead.

Any opinions or comments ?