Towers Perrin Survey Finds that the Economy is Forcing Companies to Evaluate Compensation and Incentive Plans

STAMFORD, CT, November 7, 2008 — Current economic pressures are forcing many companies to take a hard look at their compensation and incentive programs to find ways to cut costs, according to survey findings released today by global professional services firm Towers Perrin.  Contrary to past economic downturns, however, the focus on mass workforce reductions has shifted to more targeted, strategic workforce reductions and cuts in other discretionary spending.

The "pulse" survey of more than 450 companies from a range of industries and sizes was conducted in mid- to late October 2008, and provides the most current insights into how U.S. companies are thinking about the workforce and compensation trends in response to recent economic turbulence. 

"The commitment to the retention of key talent is a significant shift from past national recessionary periods, when a slash-and-burn mentality reigned," said Ravin Jesuthasan, Managing Principal in Towers Perrin's Chicago office and a leader of the firm's Rewards and Performance Management practice globally.  "Companies are entering this period with leaner workforces and the knowledge that across-the-board mass layoffs can create significant long-term problems."

In fact, the study found that 66% of respondents believe a significant reduction in head-count at their organization is somewhat or very unlikely, while less than half (46%) think a more targeted head-count reduction is probable.  Nearly half (49%) of those polled are somewhat or very likely to reduce pay/merit increase budgets, and nearly four out of 10 (39%) are considering a reduction in annual incentives and bonuses.

While cuts to bonus and salary increase pools may be preferential to mass workforce reductions, organizations recognize the importance of rewarding key talent and honoring bonus commitments in some form.  A full 54% of those polled are somewhat to very concerned about turnover of their high-performing and business-critical employees as a result of the way the organization handles the economic crisis.  To address this issue, many organizations are taking a proactive approach: 30% are considering cash retention awards and 41% are considering targeted salary increases to help retain and motivate top performers.

The survey also found that, in the companies most adversely affected by economic and market turmoil, compensation and rewards cutbacks are targeted for all levels — from the senior executive ranks to line workers.  For example, when comparing expected 2008 bonus payouts with those from 2007, respondents noted that any changes or reductions in compensation will be roughly the same for senior executives, middle managers, supervisors and nonmanagement staff: A quarter of the companies surveyed expect bonuses will drop more than 25% year over year across the board, while 39% of those surveyed believe 2008 bonuses will stay about the same as last year's for all employee groups.

"As companies wrap up a difficult year, it's a positive sign that most plan to meet their existing bonus commitments to employees," said Mr. Jesuthasan.  "This commitment will go a long way toward preserving employee trust and engagement in the coming year.  High employee engagement will be critical to helping organizations maintain productivity and profitability now and following this economic downturn."

Organizations are taking other noticeable steps to cut discretionary costs in 2008 and 2009 without affecting long-term success.  More than half of all organizations polled (58%) acknowledge they are somewhat or very likely to scale back this year's holiday party and other employee events to save money.  Seventy-four percent plan to cut spending on travel and entertainment, and 47% plan to cut training budgets.

"Companies appear to have the experience, tools and skills to address these economic challenges in a responsible and rational way," said Mr. Jesuthasan.  "The strategic and surgical approach to cost-cutting revealed in this survey indicates that organizations have learned from prior periods of economic crisis.  They are poised to successfully work through this turbulent time, retain and reward their pivotal talent and top performers, and position themselves for future growth."

Executive compensation issues

The survey also shows that most companies are still considering the significant issues the recent stock market and economic turmoil pose for executive compensation strategies and programs. For example, even though 85% of the respondents report that their company's shares are trading more than 15% below last year's levels, and almost 60% report that their stock price has declined by 30% or more, over half of the companies surveyed report that no final decisions have been made on how their long-term incentive grant methodology may need to be adjusted to reflect the change in stock price. Even fewer have decided how or if they will address underwater stock options.

Similarly, while just over half (53%) of the survey respondents have decided to leave their long-term performance targets unchanged despite recent events, many (42%) are considering the implications of making adjustments, and a few (5%) are already planning to make adjustments to reflect the new economic realities.  Decisions about whether and how to adjust performance targets hold added importance, with more than half of the survey respondents forecasting lower bonuses for 2008 performance than for 2007.

"These findings and our recent consulting experience suggest that most companies are still grappling with all of the governance, retention and motivational implications of the economic crisis for their executive compensation programs," said John England, a Towers Perrin Managing Principal and a leader of the firm's Executive Compensation practice globally.  "Many of the tried-and-true incentive compensation rules of the road will be reexamined for a current fit with the realities of today's environment, particularly for high-potential executives and those in pivotal roles who are always in demand.  Companies that haven't yet started should now begin to address the challenge."

About the study

The Towers Perrin "Compensation in Crisis" pulse survey was conducted online from October 15 to 24, 2008.  Human resource executives and staff at more than 450 companies responded, representing a cross section of industries in the United States.  Industries most heavily represented included financial services, energy, insurance and high tech.  Seventy-nine percent of the companies have more than $1 billion in annual revenues.

Expected Annual Incentive/Bonus Payments for 2008 Versus Last Year*