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November 19, 2001
Layoffs Matched by Delays in Raises, Bonuses
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y U.S. employers are balancing staff reductions with across-the-board cuts in bonuses and pay raises. They are also considering overhauling stock option programs as more options go "underwater" in the wake of the economic slowdown, according to a new survey.

The survey, commissioned by Watson Wyatt Worldwide, found that 60 percent of employers expect to reduce annual bonuses for executives this year while 54 percent will cut bonuses for middle managers. About half (48 percent) will pay smaller bonuses to individual workers.

The survey further shows that in order to achieve reward plan objectives some employers (41 percent) are changing their incentive plan formulas in the middle of the year to adjust performance targets or payouts to the current economic reality.

A total of 110 mid- and large-size companies representing a broad range of industries participated in the survey, which was conducted in late September as a supplement to a larger study of pay practices.

According to the survey, approximately one-quarter of employers have delayed or reduced salary increases or are considering doing so; but few employers report any plans to cut or freeze salaries.

About one-third (30 percent) of employers have reduced merit pay budgets, and among those, the changes have been significant, dropping raise pools from 5 percent to 3.3 percent on average.

"It's no surprise many companies are making major adjustments
to their compensation program in the aftermath of September 11 and the continued weakening economy," says Rick Beal, a senior compensation consultant at Watson Wyatt. "However, the fact that employers are opting to delay raises and reduce bonuses rather than lay off additional workers or implement pay cuts and freezes indicates that some employers expect this economic downturn to be short-lived. Companies are also concerned about worker morale and retaining their valuable employees down the road."

More than 40 percent of the respondents said underwater stock options are now a problem and are considering overhauling their programs. Those making changes are split between issuing more options at a lower strike price or canceling existing options and reissuing them at a lower price.

"Underwater stock options have become a significant problem," says Beal. "Many companies believe they have to tackle this problem for options to be viewed as a valuable tool for attraction and retention."

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