updated 12/22/2008 3:15:05 PM ET 2008-12-22T20:15:05

Caterpillar Inc., the world's largest maker of mining and construction equipment, said Monday it will cut executive compensation by up to 50 percent next year because of weakening demand triggered by the global economic downturn.

The company also said it will reduce compensation for senior managers by 5 percent to 35 percent in 2009. Other management and support staff will see a reduction of up to 15 percent.

Caterpillar, based in Peoria, Ill., said the cuts will come from reductions in its incentive program and equity-based compensation. It has instituted a hiring freeze and plans to suspend merit pay increases for managers and support employees.

Caterpillar follows several other firms that have slashed compensation in recent weeks to lower costs. Earlier this month, Memphis, Tenn.-based FedEx Corp. said it will cut pay for senior executives and freeze 401(k) contributions for a year. AK Steel Holding Corp., based in West Chester, Ohio, plans to reduce pay for salaried employees by 5 percent starting in 2009.

Shares of Caterpillar slipped $1.37, or 3.2 percent, to $41.32 in afternoon trading. The stock, a component of the Dow Jones industrial average, has shed nearly 40 percent of its value since the beginning of the year.

Besides the compensation cuts, Caterpillar is offering incentives to U.S.-based management and support employees to leave the company voluntarily. Eligible employees have until Jan. 12, 2009, to make a decision.

Eli Lustgarten, an analyst with Longbow Research, pointed to sagging construction markets in the U.S. and Europe and easing commodity prices that have hurt Caterpillar customers in the mining and energy sectors.

About the compensation cuts, Lustgarten said: "They're making sure that everybody feels that it's a difficult year and participates in keeping the company as strong as possible as they go through this difficult period."

The move was the latest belt-tightening measure by the company, which recently laid off employees and cut contract workers in response to global economic turmoil that has hurt demand for its products, which include bulldozers, turbines and motors that power oil drills.

On Friday, the company said it will lay off 814 production workers at an engine assembly plant in Mossville, Ill. It also announced an unspecified number of temporary layoffs at two factories in North Carolina.

The company, known for its earth-moving machines, said Monday it will continue to implement cost-saving measures, including temporary factory shutdowns and more layoffs, as needed.

Lawrence De Maria, an analyst with Sterne, Agee & Leach, noted the company had been readjusting its businesses over the past two months to cope with dwindling demand.

"This is an ongoing process," he said. "This is probably not the last bit of restructuring we're going to hear from them. ... The next six to 12 months are likely to be as challenging as they've ever experienced."

In October, Caterpillar posted a 6 percent drop in third-quarter earnings and forecast essentially flat sales for 2009. At the time, Jim Owens, Caterpillar's chief executive, said the economic outlook for next year was "extremely uncertain."

Owens, who received $14.8 million in compensation last year, had forecast pockets of strength in global mining, energy and infrastructure markets, but warned of a third consecutive year of sales declines in the U.S. The credit crisis, he said, was likely to hamper markets in North America, Europe and Japan.

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