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December 13, 2001
Smaller Merit Raises in 2002
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loyers plan to trim their 2002 merit pay increases for all categories of employees, including executives, and are pursuing a wide variety of other workforce strategies to contain HR costs, a new survey shows.

This is in response to the business consequences of the economic downturn and terrorism, according to consulting firm Towers Perrin, which conducted the survey.

Overall, cost management is a leading area of focus, as 84 percent of respondents cited it as the most critical thing they must do now to execute their business strategies. Sixty-five percent said it would be a priority in the future as well.

The survey, called the "Towers Perrin HR Cost Management Survey: A Year-End Look," was conducted twice, both before Sept. 11 (with 126 organizations responding) and afterward (when 143 organizations responded.)

"Companies are making some significant changes in their reward strategies for 2002 and are also pursuing some fairly innovative approaches that weren't commonly practiced before," said Rich Ostuw, a senior consultant with Towers Perrin. "This reflects the serious ongoing hunt for ways to manage costs in a weak business climate, but also a more strategic approach than we've seen in prior recessions."

Employee pay is one immediate area that will be addressed. Other important areas for cost-containment now and in the future include health and welfare plan design and financing, recruiting and staffing, and training and development.

The focus now: pay

Before the end of the year, companies still have an opportunity to take action on pay, particularly merit increases, that would directly support their cost-containment strategies, and many of the survey respondents said they are doing just that.

The percentage of organizations citing employee pay as a likely focus for cost containment jumped from 37 percent in the first survey to 53 percent in the second. For 2002, a clear majority (59 percent) said they were reducing their merit budgets for all categories of employees to increases of under 3.5 percent, compared with increases of 4percent or higher in 2001.

"Looking ahead, there is no question that many employers are counting on restraint in compensation to help contain costs," said Diane Gherson, leader of the firm's employee pay consulting practice.

In a separate Towers Perrin poll of 350 employers who participated in the Annual Incentive Plan Design survey, the findings were similar - showing that 46 percent of companies have cut merit budgets by 0.6 percent to about 3.7 percent, on average, and to below 3.0 percent in a few industries.

The biggest cutbacks were reported in high tech, entertainment, financial services, metal manufacturing and professional services. This survey also found that 9 percent of participants have extended their compensation cycles (the time between raises), 13 percent are thinking about doing so and 21 percent are considering lump sum payments in lieu of salary increases.

Severe cost cutting less favored

The more severe cost-cutting measures that were commonly deployed in the last recession 10 years ago have apparently fallen out of favor. Among the respondents:

- 81 percent said they were not planning mandatory time off without pay.

- 77 percent had no plans for voluntary early retirement.

- 66 percent cited no plans for benefit reductions.

- 65 percent had no plans for a temporary pay freeze.

- 60 percent said they had no plans to implement temporary layoffs.

When asked whether their organization had changed its HR strategy after 9/11, more than three-quarters (78 percent) of those responding cited some impact:

- closer scrutiny of new hires.

- new emphasis on background checks.

- increased emphasis on safety and security.

- increased resources for employee assistance programs.

Many respondents also said they were tightening restraints on travel, with one respondent saying that a 20 percent reduction in air travel had produced a "big difference on the bottom line."

"However, these changes appear to be more refinements or adjustments rather than major deviations from existing HR practices that proved effective when economic conditions were more favorable," said Ostuw. "There is little evidence that companies shifted course with their people and reward strategies in major ways in reaction to economic conditions or the events of 9/11."

The rankings of the top 10 cost management-tactics cited most frequently by survey participants before 9/11 remained unchanged in the November survey. This is further evidence, according to Towers Perrin, that companies are not reacting in panic; rather, they are taking a hard and practical look at their people costs.

The most favored approach remains normal attrition with a limited level of hiring, and some of the other measures cited are relatively mild from a workforce management viewpoint, such as eliminating marginal employees and part-time positions.

Still, more than a quarter (28 percent) of survey participants said they were in the process of implementing a broad-based reduction in force, and another 15 percent said the idea was under consideration. Larger employers, in particular, were found to be more prone to adopt workforce reduction measures, but often acting selectively with low-performing units or employees.

"It is clear from these findings that most organizations rank cost management as the top priority in executing business strategy now and in the future," said Gherson. "Perhaps now more than in recent years, companies have an opportunity to improve their return on investment. In particular, the 'peanut butter' approach to spreading pay increases and bonuses is a candidate for retirement. This means improving performance management tools, and training and doing a better job linking individual performance measures to the drivers of company success."


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