At first blush, the recent news that Caterpillar is cutting its workforce by more than 20,000 people seems like another sign that American companies are in grave trouble during this recession.

But Cat’s story is more complex, as I recently learned during a face-to-face interview with Sid Banwart, the company’s chief HR officer. The iconic maker of 20-foot-tall trucks and other heavy equipment has been taking people management steps during the downturn that may result in Cat purring happily a few years from now.
 
For one, the Peoria, Illinois-based manufacturer is reducing its workforce according to a certain long-term logic. Banwart said that about 8,000 of the 23,000 jobs getting cut affect Cat’s “flexible” workers: contract, staffing-agency and part-time employees. Excluding its flexible workforce, Caterpillar’s headcount at the end of 2008 was nearly 113,000.

There’s a debate about whether the rise in temp and contactor jobs is a good thing for American workers, especially given the historic weakness of the U.S. safety net. Still, temps and contractors can help companies preserve key employees during downturns and ramp up quickly in a recovery.

Indeed, Banwart says Cat’s move to largely trim its flexible workforce follows a deliberate strategy to handle troughs in its business cycle. The plan is designed not only to lower costs in a recession but also to allow the firm to hold on to long-term talent. “It’s actually worked out quite nicely for us,” Banwart says of the strategy.

Even though it is cutting workers, Cat has made it clear that executives also are sharing the pain. In December, the company said executive compensation for 2009 would be cut by as much as 50 percent, while compensation for senior managers would be slashed 5 to 35 percent. Cat also suspended merit pay increases for management.

In chopping the overall pay of executives, Cat is tapping into a national mood of shared sacrifice and intolerance for fat-cat excesses. “We believe it is important to lead by example,” Banwart says.

What’s more, the equipment maker is doing its best to avoid getting stuck in the recession rut. Banwart says Caterpillar is looking ahead to 2020, when it sees revenue possibilities of $100 billion—double the $51 billion it took in last year. The downturn will pass, in other words, and the world will return to building schools, hospitals and roads.

“This is a time when we emphasize the power of the ‘and,’ ” Banwart says. “We must deal with the current reality and maintain the ability of the company to grow following the downturn.”

For example, Cat plans to spend $1.5 billion on research and development this year, Banwart says. And Cat is continuing efforts to develop future managers. Between now and 2020, Banwart expects the company to need thousands of new leaders.

It’s too early to say whether Cat has pounced properly with its cutbacks or if it has acted like a corporate ’fraidy cat—with potential harm done both to its employee morale and ability to ramp production back up quickly. Banwart says voluntary turnover has “shrunk almost to zero.” But that could be a reflection more of the dire job market than commitment to the company.

A key test will be if Cat’s employee engagement scores continue their seven-year rise despite tough times. If they do, that will be a good sign that this Cat, while wounded, has a lot more life in it.