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Is it better to cut positions or just salaries? . . . and carry the eight . . . wait, stop calculating and think of employee morale.

This story appears in the April 2002 issue of Entrepreneur. Subscribe »

Last summer, sales were slowing at ChatSpace Inc., a 25-employee technology company in Carlsbad, California. The company's corporate customers were holding back on purchases, waiting to see where the economy was headed. Although ChatSpace had a history of strong growth, by mid-July it was clear that the company wasn't going to hit its third-quarter projections. Two of its sales positions were eliminated, and by mid-August the company faced the prospect of making deeper staff cuts. But rather than go through further layoffs, ChatSpace went with a new strategy: Everyone took a temporary 10 percent pay cut until the company could get back on track.

"The 10 percent pay cut is roughly equivalent to two and a half people that we would have had to eliminate out of the group," says Eric Olinger, 37, president and CEO of the 3-year-old company. "There was no one we didn't need and didn't want to keep."

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