HP chairman and CEO Mark Hurd could face a backlash to his plans to reduce basic pay and some benefits across the company in the wake of disappointing results.

Hurd said the move was an attempt to avert mass layoffs and he will take a cut of 20 percent of his base pay while members of the Executive Council will see their base salaries reduced by 15 percent.

Other executives will see 10 percent reductions in base pay, and the base pay of all other exempt employees (salaried staff) will be reduced by five percent, according to Hurd's internal memo (run in full below).

However some HP staff have commented that Hurd’s 20 percent salary cut is tiny compared to his overall salary package.

In 2008 Hurd’s base pay was $1.45 million (£1.01 million), this was topped up by bonus, pension, share option and incentive payments, bringing the total package to $42.4 million. Hurd’s salary reduction on his base pay will be $290,000, less than one percent of his total package.

Explaining the cost cutting proposal, Hurd wrote: "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 percent, 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 "stabilise" its cost structure by reducing pay and adding efficiencies. This includes changes to the US tax-free pension scheme, called 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.

Hurd’s proposals have angered workers at EDS in the UK, which was acquired by HP last year. EDS was one of the few bright spots in the company results and the Unite union, which represents many EDS staff in the UK is demanding urgent talks with the company.

Next page: HP CEO Mark Hurd’s letter in full.

HP CEO Mark Hurd’s letter in full.

Today, HP announced first quarter results amid one of most difficult economic downturns that any of us has ever faced. I am proud to say that we continue to execute well in this very challenging environment.

We grew revenue 1 percent year-over-year, or 4 percent in local currency, and you need to look at these numbers a little differently this quarter. For the first time in a long time, the dollar was strengthening, so the currency conversion was actually a headwind for us. We also continued to show strong operating leverage with non-GAAP operating profit up 10 percent year-over-year. This was a solid performance, and I thank all of you for your efforts.

But really, Q1 was like a tale of two companies.

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.

When you take HP services out of the mix, it’s a very different picture. PSG had revenue down 19 percent. ESS had revenue down 18 percent. IPG had revenue down 19 percent. In fairness, across IT and even other industries, product businesses are struggling in this economic climate. And we did gain share in key market segments. PSG and ESS gained roughly 1 and 3 points of share, respectively. In IPG, quite frankly, we still have work to do across a number of dimensions like inventory, both owned and channel inventory.

In an environment like this, there’s no margin for error and no tolerance for inaction. To give you a little insight into my world, after we report our earnings, we engage in a dialogue with analysts and investors. They’re going to ask what we’re doing in light of the current environment to right-size these businesses.

The math is pretty straight forward. From a productivity standpoint, you’re supposed to reduce headcount on par with declining revenue. If you believe the environment isn’t going to improve, you should take a bigger cut to get in front of the problems. You can do the calculation, as easy as I can. We have about 100,000 people in our product businesses, with revenue down roughly 20 percent, and an environment that may not get any better in 2009.

I’ll be asked by investors, “Where’s the job action, where are you taking out this roughly, 20,000 positions?” Well, I don’t want to do that. When I look at HP, I don’t see a structural problem of that magnitude. There are pockets where restructuring needs to happen, and areas where actions will be taken as part of our ongoing workforce optimization process. But at a company-wide level, I don’t believe a major workforce reduction is the best thing for HP at this time.

I think we are fundamentally sound, and when the economy picks up, I want HP to be strong, and to take share and to outgrow the market. I said it last quarter, my goal is to keep the muscle of this organization intact. But we do have to do something…because the numbers just don’t add up and we need to have the flexibility to make the right long-term investments for HP.

So we are going to take action. We have decided to further variablize our cost structure by reducing base pay and some benefits across HP. My base pay will be reduced by 20 percent. The base pay of Executive Council members will be reduced by 15 percent. The base pay of other executives will be reduced by 10 percent. The base pay of all other exempt employees will be reduced by 5 percent. For non-exempt employees, base pay will be reduced by two-and-a-half percent. Additional efficiencies, including changes to the US 401(K) plan and the share ownership plan, will also be implemented. Of course, the implementation of all of these actions is subject to compliance with local laws and regulations. Follow-up communications will detail the timing and the plans in your location.

This does not change our pay-for-performance strategy at HP. If we outperform, and there is a chance we will, then we will increase the total amount of variable pay. In fact, the financial flexibility we’re gaining helps put us in a better position to compete and to win in the marketplace, and fund the bonus program this year based on pre-adjusted salaries. If the company performs well, if our individual businesses perform well and if you perform well, then you could potentially make up the difference with your bonus. I can’t promise you anything, but I tell you…there is a chance…if we get this right.

To be clear, these actions don’t make up for all of the decline in revenues. We’re also benefiting from the tough actions we’ve taken over the last few years. People always asked, “Why are we so focused on getting costs out in good times?” Now…is why that work was so important. We’ve been able to bank some of those savings, and we’re making a withdrawal, which along with the actions we’re taking today, I hope, will get us through this recession.

Again, there are no guarantees. If the environment gets worse, if the downturn lasts longer than we’re assuming, if our performance declines, we’ll have to reassess. But for now I believe this is the right thing for the strength of HP.

I know this is a tough time. But if we get this right, HP can be the kind of company that not only has led, but will extend its leadership. We can emerge from this recession in a powerful position to create value for our customers, our shareholders and our people for years to come.

Thank you.