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Rocky Economy Causing Some Companies to Reduce Raises and Bonuses

Oct. 24, 2008 — At the risk of sounding like a broken record, it should be no surprise that the faltering economy is to blame for yet another business issue. Two new surveys reveal that many U.S. workers can expect to see lower-than-expected salary increases and bonuses next year.

A survey of 411 large companies by Hewitt and Associates asked if employers plan to make changes to their compensation budgets in light of the current economic situation. The survey found that 42% of respondents are revising their salary budgets and variable pay spending strategies related to the economic downturn or because of increasing cost pressures. For these companies, pay raises will decrease by about 1% next year. So while salary increases for hourly and salaried exempt employees is expected to go up, it will be up only 3.1%, which is the lowest projected base salary increase since 9/11.

A Mercer study of the pay trends of 190 mid-size and large employers found that 24% of respondents plan to reduce their base pay budgets from their April projections by 0.5% (their average increase is now 3.2%) and 18% of respondents plan to increase their budgets form their April projections to an average of 3.8%.

While salary budgets for 2009 appear to be consistent with the April projections, 30% of respondents said they have made staff reductions, 37% are planning or are considering staff reductions, 32% plan to curtail overall hiring to below replacement levels and 31% said they have already curtailed hiring or are considering it.

The Hewitt survey found that companies that are revising their salary budget projections for 2009 are also:

• considering a hiring freeze (52%)
• layoffs or reducing staff (55%)
• reducing promotions (25%
• implementing a pay freeze (15%).

The Hewitt survey found that 49% of companies making adjustments to their salary budgets plan to reduce variable compensation payouts; 66% plan to cut bonuses by more than 10% in 2008 and 42% of companies in 2009.

“This is a very real challenge for companies, as they struggle to find ways to manage costs during a time when attracting, retaining and motivating employees is more important than ever,” said Ken Abosch, leader of Hewitt’s North American Compensation Consulting business. “As these pressures continue, we expect to see an increased emphasis on variable pay to motivate employees and help them cope with growing economic pressures. These programs allow companies to more effectively manage fixed costs, focus on key business objectives, and motivate and reward employees with bonuses when they attain performance goals. The bottom line is that variable pay is a smarter way to manage a business in a good or bad economy.”

The Hewitt survey also found that 38% of responding companies are reserving a portion of their salary increase budget for their highest-performing employees; 23% are creating supplemental, discretionary incentive pools for these workers; and 20% are offering employees retention bonuses for a specified period of employment.

Mercer’s survey also found that companies are broadening performance differentials by granting higher salary increases to their top performers. The highest-performing employees are expected to receive base pay increases of 5.3% in 2008, compared to increases of 3.4% for average workers and 0.7% for the weakest performers.

“The trend to strengthen performance management programs to better differentiate strong from average or weak performers will only gain more traction in the months ahead,” said Steve Gross, global leader of Mercer’s broad-based performance and rewards consulting business. “Greater differentiation of top performers allows employers to attract and retain those employees that will contribute to the company’s competitiveness and success.”

Pay for performance is also slightly down, according to the Mercer survey. Weak-performing companies plan to reduce overall short-term incentive (STI) payouts and cash bonuses. STI incentives for 2008 performance are projected to decline 20% or more for all employee groups. Executives are expected to earn a STI payout of 35% of base pay, which is down from more than 40% in 2007. In order to retain high performers, 28% of respondents said they have implemented, are contemplating or are planning to develop new variable pay programs or make changes to existing programs.

WorldatWork will conduct an update to its 2008-09 Salary Budget Survey starting in November; results will be released in January 2009.

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