Sour Economy Prompting Reviews of Compensation and Incentive Programs
The downturn in the economy is forcing most companies to take a hard look at their compensation and incentive programs to find ways to cut costs. For employees at many companies, reductions in 2008 bonuses and 2009 merit pay increases lie ahead over the coming months, according to a Towers Perrin survey of human resource executives and staff in more than 450 companies.
However, the survey also found that, in contrast to past economic contractions, instead of relying on mass workforce reductions, most employers this time around are placing more emphasis on targeted, strategic cutbacks in the number of people on their payrolls, focusing on those in less critical roles and the low performers. The shift reflects the fact that many companies are entering the current slump with comparatively lean workforces and know that they need to retain valued talent to meet future performance needs. There's an understanding that across-the-board layoffs can lead to significant long-term problems.
The Towers Perrin survey, taken in mid- to late October — a month that saw stock markets tumble around the world — also found companies are looking to contain costs by lowering spending on discretionary items such as perquisites, travel and entertainment, and training budgets. Almost three-quarters, for example, say they plan to curb travel and entertainment spending.
Trends in compensation and incentive programs
Here are some of the key survey findings:
- Only 16% of U.S. respondents view large-scale layoffs as likely, while 62% expect to freeze or reduce hiring, and almost half (46%) expect or plan targeted workforce reductions aimed at low performers and those in less critical roles.
- Over half (54%) of the companies surveyed report concern about the risk of losing high-performing employees as a result of taking measures like cuts in bonuses or pay increases. Actions these companies said they would consider to retain talent include salary increases (41%), cash retention awards (30%), stock retention awards (24%) and higher bonus payouts (22%).
- Nearly four out of every 10 companies have adjusted their 2009 salary budgets downward as a result of the financial and economic turmoil. On average, these reductions represent about one-third of the overall salary increase budgets originally planned for employees below the executive ranks among the companies cutting their budgets — and almost 50% of the increases planned for senior executives.
- Only 6% of all companies surveyed plan to freeze their 2009 salary budgets for employees below the executive level, while more than twice as many (15%) plan no increases in executive salaries next year.
- More than half of the companies planning to pay bonuses for 2008 performance expect to make smaller payments than last year, including a quarter that expect bonuses to drop more than 25% on average. Fully 39% of companies planning to pay 2008 bonuses believe bonuses will stay about the same. Only about 10% expect to pay larger bonuses.
- While the great majority of companies report that their shares were trading significantly below levels of a year ago, 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 their stock price. Even fewer have decided at this point how, or if, they will address underwater stock options.
An overview of how surveyed companies plan to adjust their compensation and incentive programs for employees in 2009 is shown in the exhibit.