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October 25, 2001
Bye Bye, Bonuses
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y companies are expected to drastically reduce their year-end employee bonuses, given the slowing profits and cost cutting that had commenced even before Sept. 11, ABC News reports.

Those hardest hit will include workers in finance, many of whom earn the majority of their income in bonus pay every year, according to ABC.

Employees for large corporations that have come to adopt the bonus system could also be affected. Indeed, even before Sept. 11, companies like automaker Ford and financial services giant Charles Schwab were talking about cutting bonuses in an effort to contain costs.

As much as $40 billion to $50 billion in personal income could be lost from reduced bonuses in early 2002, according to John Youngdahl, chief economist at Goldman Sachs. At the end of August, Youngdahl put that number at $30 billion, but revised his figures upward in light of the terror attacks and the subsequent U.S. military action.

Though the economist hasn't issued a follow-up report on compensation since the attacks, he says he is looking closely for anecdotal evidence of further cutbacks in their wake.

"It's still very hazy at this point, but very largely negative from all appearances," he tells ABC.

A dropoff in bonus pay is bad news for the entire economy, since so many companies have come to rely on variable compensation in recent years. A recent salary study from World at Work, a nonprofit association of human resource professionals, showed that almost 66 percent of the more than 2,500 U.S. firms surveyed currently offer some form of variable pay, up from 61 percent of companies offered bonuses in 2000.

One recent study from Andersen Consulting showed that of 57 of the firm's clients surveyed, 22 percent do not plan to offer any bonuses this year as a result of the slowdown, while 19 percent said they didn't know yet. Another 22 percent of those companies said bonuses would be less than 25 percent of employees' target bonus.

"Based on our survey, it's clear that people's discretionary income is going to be cut into substantially," says Michael S. Kesner, the partner in charge of Andersen's U.S. executive compensation practice.

A recruiting problem

The dearth of bonuses is also posing challenges for recruitment. Many executives, reluctant to leave the security of their current jobs, are becoming more demanding in their job searches.
"I'm working on a couple of cases now, where the executives are asking for guaranteed bonuses not just for next year, but at least a half guarantee for '03," says Kesner.

"The bigger issue in recruiting right now is security," agrees Chuck Wardell, managing director at recruiter Korn/Ferry International's New York office. "People are saying, 'I have a good job,' and they're much more risk-averse than they were."

But in today's environment, many companies simply can't afford to guarantee lavish packages seen during the bull market. Instead, they're trying to meet recruits halfway by offering alternatives to cash bonuses like supplemental retirement plans or restricted stock, which is more valuable than stock options because it is an outright gift of stock, rather than an option to buy it at a certain price.

To view the ABC News story, click here.

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