New Hay Group Report Reveals Recession's Impact on Employers Worldwide

 The Hay Group just released results from their March '09 "Reward in a downturn" survey that highlights key tactical and strategic changes global employers have taken in response to the deep recession.  Some key observations reported in these results resonate with what we know to be true through our daily experiences at work or from the recession's direct impact on our own family and friends.

As you may recall from only a few short months ago (though it seems much longer given the depth and length of this recession), 2009 merit projections averaged just below 4%.  Fast forward to March, '09 where the reported overall projected salary increase has been downgraded to 2.8%.  Further compounding the issue of too few dollars to make merit increases meaningful, the report identified the revised merit budget for high performers at just 3.0%. 

This slim differential of .2% between "all employee" and "high performers" follows the conventional wisdom of my fellow bloggers on this site; that the dollars simply aren't there to make any meaningful difference in rewarding the two groups based on their performance.  According to this report, at least 25% of all employers are now budgeting zero pay increases across the board for 2009. 

Executive pay now is a laggard to other employees in terms of merit pay increases.  With executive pay under scrutiny, executives can expect lower total compensation packages based upon diminishing bonuses and falling stock prices. Executives are projected to receive an even smaller merit increase of 1.5% versus the 2.5% allotted for management and clerical employees.

The report identified top cost-cutting changes implemented globally by employers: layoffs, freezing temporary pay and promotions, and reducing benefits. 

Middle management is slated to become the next target for reduction of expenses through job elimination.  While executive jobs salaries are more frequently being frozen than those of other employee groups, organizational and job restructuring to reduce staff levels is highest amongst white collar employees.  Because there are more white collar employees than executives, the resulting higher number of restructures or job reductions produces greater labor cost savings to employers. 

Other key findings (and corresponding percentage of surveyed companies taking these steps):

• HR programs are being decreased or eliminated (27%)
• Overtime pay has been eliminated (19%)
• Use of contractors has been cut (30%)
• But...few companies are eliminating or decreasing health care benefits (5%) or savings plans (3%)
• A substantial number (38%) are making design changes to their bonus/incentive plans
• Long-term incentive plans have dropped significantly, by an average of 37%
• Not surprisingly, employees are most concerned with job security (88%)

• Employers are primarily concerned with the ability to retain top performers (89(%) and maintaining a motivated workforce (91%)

Hopefully, we've hit the bottom of the recession and these statistics won't head further south, but only time will tell.  To learn more, see the executive summary of the March 2009 "Reward in a downturn" survey on the Hay Group's website.

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

Credit: Flikr photo courtesy of "Inkyfingerz's"

Comments

[Darcy Dees]

Is it appropriate to call an increase a "merit" increase if the diffential between a top and average performer is only 0.2%? If companies don't have the appetite to withhold increases from average performers to provide a higher increase for the their top performers (and some won't since it's tough to alienate the biggest portion of your workforce who are steady contributors); then perhaps they should call it a "cost of living" increase and spread it evenly to everyone.

[Paul Weatherhead]

In discussing meaningful distinctions in pay to reinforce meaningful distinctions in performance, its imperative to consider both salary increases and lump sum payments. In last fall's WorldatWork's Salary Budget Survey it was reported that average merit increases were 3.9% and ranged from 3.6% for middle performers to 5.2% for high performers (a differernce of 1.6%). The report also said that average variable pay program payments were 12.6% for exempt employees. Seems to me that the salary increases alone aren't enough to make meaningful pay distinctions, but when combined with lump sum payments, they have a better chance of influencing behaviors.

Please, let's not re-debate the merits of "cost-of-living" increases. If anyone wants to read a recent article on the problems with CPI-based pay policies, check out this fall 2008 article on WorldatWork's workspan magazine: http://www.worldatwork.org/waw/adimLink?id=29395

[Darcy Dees]

Paul, please don't misunderstand me; I don't think that "cost of living" increases are the way to go. Most of us have seen increases spread out like peanut butter in the past, and that's my contention. Is it appropriate to call those types of increases "merit"?

I agree with your statement about incentive plans. I think those continue to be the strongest tool in a pay-for-performance environment.

[Vita Taylor]

Darcy, I agree that the point is to provide a meaningful merit increase, or just don't insinuate that it is performance or merit that you are paying for. Over a year ago, I updated my website to include a COMP101 section providing some basic instructions on how compensation varies in inflationary and recessionary times. My suggestion is two-fold: 1) consider making the increase an incentive (variable) increase (not added to base pay) or 2) if providing a merit increase, make the difference in average performance and outstanding performance meaningful (in my example: 5% difference).
See example:

http://www.compensationsolutions.us.com/compensation101.php?page=3

I know that it is a tough message to sell, but if we are really not differentiating on increase percent, we had best find some new name for it, because it is certainly not "pay for performance or merit."

[Paul Weatherhead]

Perhaps we should also build into our merit or PFP plans the communication to employees of the long term cost differences between apparently small differences in base salary increases.

For example, a 1.6% difference in a merit pay increase between two people at $50,000 would be over $5,000 if spread over 5 years and included the roll-up costs of benefits. This is not just smoke and mirrors; but real costs to an employer.