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Employee Pay Cuts on the Rise

Source: Towers Perrin

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Posted on 13 Feb 2009

According to a new Towers Perrin survey of midsize and large U.S. employers, the deepening economic crisis is prompting most companies to take a number of steps to curb their workforce costs.

Overall, the modifications will mean lower — or no — 2009 salary increases and bonuses for 2008 performance for many U.S. employees, along with reductions in the value of 2009 equity grants for many executives.

The survey was conducted online from January 6 – 14, 2009 and drew responses from 513 companies. It updates an earlier online survey of companies that was conducted by Towers Perrin in October 2008, when stock prices plunged and public worries about the state of the economy intensified. Since then, name-brand companies across the board have announced reductions in employee head count, along with pay freezes, suspension of 401(k) contributions and other measures not seen in many years on such a wide scale.

The latest Towers Perrin survey of compensation practices finds that most companies are holding the line on salaries by cutting their 2009 merit increase budgets, freezing salaries or even cutting base pay in some instances. In addition, many employees will see smaller bonuses for 2008 performance, reflecting the deterioration in earnings and other financial metrics typically used by companies to determine compensation for the year.

The survey also shows that many companies are rethinking their approach to determining the size of their 2009 long-term incentive grants in light of significant stock price declines and considering what to do, if anything, about underwater stock options. Employee Talent Remains a Concern

At the same time, however, the survey found that most companies — approximately 62% of respondents — remain concerned about the potential impact on their ability to retain high-performing talent or those in pivotal roles. To address this concern, many are turning to salary increases and other forms of cash rewards even as they contemplate reducing such expenses for the rest of their workforce.

Key Findings About Employee Pay

Survey highlights related to employee pay programs include the following:

* 74% of respondents have taken or are considering approaches to staffing levels, such as hiring freezes or reductions.

* 58% have taken or are considering targeted staff cuts that focus on less critical roles and poor performers.

* Four out of 10 companies have completed or are contemplating salary freezes.

* Among those that are not freezing their 2009 salary budgets, the average overall pay increase this year has declined to 3.0% from the 3.7% level they were planning before the downturn.

* 54% of companies will pay smaller bonuses for 2008 performance.

* 40% of respondents expect to pay executive bonuses 25% or more below last year's levels.


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