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October 08, 2002
Making Adjustments in Pay, Benefits
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nomic uncertainty is taking its toll on workers throughout North America this year, with a vast majority of companies reducing their salary increases, eliminating jobs, or putting hiring moratoriums in place, according to a new survey of 431 companies conducted by Watson Wyatt Worldwide.

The consultant also polled more than 3,000 top-performing employees at various companies and found that most would rather give up their stock-based rewards and skill- and career-development opportunities than have their benefits or annual pay and bonuses reduced to help their companies address financial difficulties.

"During the past year, the lingering effects of the economic recession forced companies to make hard decisions about their human capital investments as they worked to contain costs and maintain competitiveness," said Laura Sejen of Watson Wyatt. "For example, most companies trimmed pay raises this past year, although many are now boosting raises to levels of the past several years."

Merit increase budgets are expected to rebound to 3.8 percent in 2003 from 3.4 percent in 2002, according to the study.

According to the survey, more than eight out of ten (82 percent) of the companies surveyed implemented at least one of the following cost reduction measures during 2002:

Cost-Reduction Measures Implemented in 2002:

Reduced staff - 53%

Reduced salary increase budgets - 46%

Froze/greatly reduced hiring - 46%

Increased employee contributions for benefits - 38%

Eliminated/severely cut bonuses - 21%

"During times of economic stress, there is strong pressure at many organizations to make across-the-board cuts in their human capital investments, even though these changes often hurt more than they help. Our study clearly shows that different rewards investments have different outcomes," said Sejen. "The challenge for employers is to invest in strategies that mitigate short-term cost concerns while ensuring long-term competitiveness."

Top-performing employees, meanwhile, cited dissatisfaction with pay as the number one reason they leave their companies, followed by dissatisfaction with management and lack of promotion opportunities. If their company faced financial difficulties and needed to cut costs, only two percent of top-performing employees said companies should first cut their benefits or reduce their salaries/bonuses, while 47 percent would prefer to lose their stock-based rewards first.

"Companies interested in retaining top-performing employees need to make certain they are using their rewards programs to distinguish between top-performing and average employees," said Sejen. "Despite research that shows that such distinctions matter, fewer than 40 percent of top-performing employees believe they receive moderately or significantly better pay raises, annual bonuses or total pay than do employees with average performance."

Other key findings from the study include:

- Companies continue to have difficulty attracting and retaining critical skill employees, although the challenge is not as great now as it has been for the past two years. Forty-five percent of companies said it is difficult to attract critical skill employees; 26 percent say they have trouble retaining them. The health care industry continues to face the biggest attraction and retention challenges. Eighty-one percent of health care organizations said they are having difficulty attracting critical skill employees, compared with 41 percent for all other industries.


- Customized rewards are linked to improved financial performance. Companies that provide tailored reward programs to employees have median three-year total returns to shareholders (TRS) levels that are nearly double those of organizations that do not.

Top performers value certain monetary and non-monetary rewards programs more than others. When it comes to monetary rewards, top performers place the highest value on annual bonuses, stock grants and project incentives. The most valuable non-monetary rewards, according to high performers, are flexible schedules, advancement opportunities, and work-at-home arrangements.
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