A handful of top managers at a year-old Internet company gathered around a conference table last November. As the eighth hour of their emergency strategy meeting stretched into its ninth, they all looked at each other in desperation. The only item on their agenda: how to preserve their company. The best solution offered so far: slashing everyone's salary by half.

In the end, the New York-based Web-hosting company did decide to halve everyone's pay, says a senior vice president at the company, who asked that her identity and that of her company be withheld since she fears scaring off potential investors.

"We all kind of looked at each other and said 'We believe in this company, and we also believe in the people that are in this office.' I could not figure out who I could possibly lose and maintain the level of work," she says.

In recent months, with venture capitalists zipping up their wallets and current investors losing faith in their fledging dot-com investments, the once free-flowing river of cash has turned into the merest of trickles - and Internet companies are fading. Dot-coms have been closing up shop in record numbers since October 2000.

One study estimates that 210 dot-com companies closed in 2000, citing that more than half of them, 121, occurred between October and December. And according to a study by outplacement firm Challenger, Gray and Christmas, dot-com layoffs in the second half of 2000 increased 600 percent from the first half.

Paycuts more common than you might think

The slashing of salaries to ensure a company's survival is not unique to this anonymous dot-com.

About.com, a Web directory of more than 700 niche websites run by real-life guides, is one success story. During their start-up year (1997) many employees went without pay for an entire month, says a spokesperson for the company. (The company had approximately 50 employees at that point.) Three and a half years later, About.com now employs more than 500 people and enjoys a stable source of funds (thanks to new parent company Primedia Inc.)

APB.com wasn't so lucky. In mid-2000, this crime-reporting news site told its staff that they would have to go one week without pay as its editors made a last-ditch attempt at getting funding. That week dragged into several weeks and most people soon left. Out of 140 employees, only five or six employees stayed on. The company, seven million dollars in debt, filed Chapter 11 in July.

In yet another pay cut scenario, Mom.com, an online resource for Moms, is waiting to see the results of its gambit. When the company announced it would lay off nearly half its 25-person staff in June, some employees volunteered to stay on for free and others offered to take pay cuts so not as many positions would have to be eliminated. More than six months later the site is still there. The company would not return Vault's calls for a status check, but an article in The Baltimore Sun dated September 27, 2000, has one of the cofounders reporting that the company has since reconfigured its business plan to produce more revenue.

Reality bites

John Challenger, CEO of Challenger, Gray and Christmas, a company that keeps track of the dot-com decline with a monthly dot-com layoff report, says he's not surprised to hear about voluntary salary reductions.

~ "If you have a great group of people with a vision everybody strongly believes in and people are willing to [take a pay cut] because of the mission involved, then [taking a pay cut] is a way to continue to fight the good fight to try to get to the point where you turn the corner and take whatever measures you can to get you there," he says.

It can go both ways, says Challenger. You can have people who just say "No way, this is the last straw, I'm going to go get a new job," and then you can have organizations where the sense of purpose and community is so strong that it becomes far more important than the money.

Should I stay or should I go now?

No one is ever coerced into accepting a pay cut. "People can leave," says Challenger. "Nobody is telling them that they have to stay."

But what they are saying is that they are operating on a shoestring, says Challenger.

"The cash is so tight that they're on these severe austerity programs," he says, "it reminds me of ship wrecks where the survivors are out in a rowboat trying to get to shore."

And although some people did leave the unnamed Silicon Alley dot-com, most stayed.

"Everyone took the pay cuts really well," says the senior vice president of the unnamed company, adding that only five to 10 people out of 300 employees left immediately. "I think they felt enormous insecurity, which they all should have felt when they first took the job anyway."

In November they were 300-strong; today they are a staff of 240.

Options - the easy route

One key detail is what they got in exchange for their loss of salary: options, and lots of them.

The pay cuts were limited to four months, with the company promising to reevaluate their financial status in February to see if they could bump people back up to their old salaries.

The senior vice president says it was important for her staff to get something in exchange for their decrease in pay. Even if, she admits, those options are, at least momentarily, worthless. She laughs in agreement at the apropos analogy of their stock options being a classic case of the Emperor's New Clothes.

She doesn't anticipate that their salaries will be bumped back up in February, but at the same time she expects that her employees will stay on.

"The time that it's bought us in retaining the people has been an exciting time; people are more addicted now then they were in November," she says.

Still, the sacrifice hasn't been easy. "I took a 50 percent salary cut, so did my coworkers and so did the other senior vice president of marketing," says the executive. Her salary is now a subsistence allowance. "I haven't made this little since I was 24," she says.

Her father, who also works at a dot-com, was recently in the same leaky financial boat. He asked his daughter what she thought of her company's decision to implement salary cuts rather than lay people off. "I happen to be under the belief that professionally, lay-offs are better," she says. "But mentally, I couldn't do it."