Compensation Trends Improving, but Employees Won't Make Up Lost Ground From 2009, Just Yet, Says Towers Perrin Study

STAMFORD, CT, December 7, 2009 — Salaries will be on the rise in 2010 at many companies across the U.S., according to recent research from Towers Perrin. This is a significant shift from the lockdown many organizations placed on compensation budgets during 2009. In fact, 65% of companies that froze salary budgets in 2009 will unfreeze them in 2010. Yet most companies report continued uncertainty and lack of confidence in the near term, and are therefore limiting annual merit increases accordingly.

Just one-third of those surveyed anticipate significant improvement in business conditions for their industry or organization by the close of next year's second quarter. As a result, the median salary increase for employees, excluding those who received no increase at all, will be only about 3% in 2010 — an increase relative to 2009 at many companies, but down from the nearly 4% median increase seen in the pre-recession days of 2007. Simultaneously, in 2010, companies plan to put more emphasis on differentiating the pay increases they do grant as part of their strategy to retain key talent. 

"Companies are making an effort to gradually return some sense of normalcy to compensation budgets in the coming year," said Ravin Jesuthasan, Towers Perrin Managing Principal. "But in the current environment, 'normal' is a relative concept. Employees coming off a year with no salary increases or bonuses will likely appreciate a small bump in compensation, even if it is noticeably off from pre-recession norms." 

In 2009, companies made a number of cuts to employee compensation programs in an effort to reduce expenses and perhaps avoid layoffs. In total, 43% of companies polled froze salary budgets for 2009; 25% cut back on employer 401(k) contributions, and 17% reduced hours worked for some or all employees. For 2010, the plan is to slowly reverse these strategic cuts as businesses take thoughtful actions to balance the competing needs of cost reduction and talent management. In the coming year, just 17% of companies polled plan to have a salary freeze in place and, 7% will reinstate salaries across the board.

Employee 401(k) plans should also see modest improvements in 2010. Of all companies polled, 10% plan to increase employer 401(k) contributions in 2010.  Among those companies that cut back on the 401(k) match in 2009, the change is more dramatic; in this group, a full 35% are planning to increase their 401(k) contributions next year.

Companies in many countries around the globe share the U.S. group’s conservative outlook on 2010, with projected median salary increases around 3.0% or less. On the opposite end of the spectrum, employers in the BRIC countries (Brazil, Russia, India and China) and certain high- inflation economies are projecting faster salary growth, with expected 2010 salary increases of 7.0% or higher, according to Towers Perrin’s 2009-2010 Global Compensation Planning Survey conducted in summer 2009.

Retention in the Recovery

Despite the projected compensation increases, companies appear to be growing concerned about retaining their high-performing top employees and those in pivotal roles once hiring picks up. According to the Towers Perrin research, 70% of companies are very or somewhat concerned about losing key talent as a result of the cutbacks made during the recession. And this talent flight concern is likely warranted, as many companies indicated they plan to increase hiring next year and will almost certainly look at competing organizations in their industry or region as a possible source of talent. Specifically, of the companies surveyed, only a third plan to freeze or reduce hiring in 2010 (down from 65% in 2009), and a full 21% of companies polled plan to increase hiring for the year.

"Leaders understand there may be repercussions to the deep cuts required by the recession," said Jesuthasan. "Organizations that plan to recover quickly can’t sit back and watch top talent walk out the door. Companies that use differentiated compensation strategies as a means of retention and recognition are realizing real returns — and we see more organizations considering this strategy for 2010."

Differentiating pay and other compensation programs allows managers to adjust annual salary increases or bonuses to match an employee's performance or value to the organization's long-term needs. In 2010, a full 48% of companies indicated they will continue with the same differentiation strategies they used in 2009 for their 2010 salary review process, while an additional 40% will differentiate more than in prior years. The vast majority (93%) of companies will be looking specifically at individual performance as the basis for differentiated pay increases.

More specifically, 2010 will see an increase in the use of all forms of compensation to keep top talent: 49% of employers plan to use straight salary increases as a retention tool in the recovery; 32% plan to issue cash retention awards; 26% will likely issue stock retention awards, and 25% will use higher bonus payouts.

Second Straight Year for Executive Salary and Bonus Declines

Despite employer efforts to restore some of the compensation withheld during the recession, it could take employees years to make up for recession-driven losses to their salary and other compensation elements.

"The average employee is being hit on multiple fronts," said Jesuthasan. "Many workers lost out on a 2009 merit increase and saw their 401(k) match reduced or eliminated. In 2010, that match may return in some form — but merit increases will be low and provide a percentage bump on a smaller base than would have been the case had salaries not been frozen the prior year."

In addition, bonuses are down for the second consecutive year at many companies, with almost half of those organizations polled planning to pay lower or no bonuses for 2009 performance. Thirty-six percent of companies surveyed expect 2009 bonuses for management-level employees to be down; another 11% plan to pay no bonuses at all to this group. Other exempt employees fared similarly, with 47% of companies reducing or eliminating their bonus payouts.

The survey results indicate senior executives will also see declines in salary and bonuses for the second straight year. While only 12% of companies plan to freeze salaries for all employee groups in 2010, 23% of those surveyed plan to freeze salaries for senior executives next year. The median annual salary increase for executives will be 2.5%, compared to 2.9% at the organization overall. Executive bonuses will also be down slightly more than those for employees, with 49% of senior executives receiving reduced or no bonus in 2010 for 2009 performance (compared to 48% or less for employees).

In addition, many companies have yet to make decisions about the size of 2010 long-term incentive (LTI) grants, given the continuing uncertainty. That said, virtually all organizations surveyed have or plan to make some adjustments to their overall LTI programs. Among those making changes in 2010, 48% will change the LTI vehicle mix; 44% will change the threshold, target or maximum payout level, and 41% will add performance measures.

Methodology

Towers Perrin’s most recent compensation research, Compensation Strategies for an Uncertain Economy: The Evolution Continues, was conducted via an online survey in late October 2009, as part of a series of ongoing surveys to gain insight on how organizations are responding to the economic turmoil and balancing key talent and cost objectives. The survey focused on the changes companies have made in 2009 or are planning for 2010 in light of current economic trends, including changes in compensation, retention of high performers, implications for annual and long-term incentives, and other workforce issues. In total, 333 compensation professionals and HR executives provided information on their U.S. operations.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management.  The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting.  Towers Perrin has offices and alliance partners in the United

States, Canada, Europe, Asia, Latin America, South Africa, Australia, New Zealand and the Middle East. More information about Towers Perrin is available at www.towersperrin.com.