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October 03, 2003
Less Cost-Cutting Predicted for 2004

Corporate America may finally be done with its drive to cut costs in the HR department, according to a new survey.

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Watson Wyatt Worldwide, the HR consultant that commissioned the survey, also found that companies continue to revamp their annual bonus and long-term incentive programs to attract and retain top performers and critical-skill workers.

The survey found that only 18 percent of the respondents expect to require employees to pay a greater share of benefit costs next year, compared to more than half (56 percent) that did so over the past 12 months. Other cost-management measures that companies implemented during the past two years—such as reducing salary increase budgets, bonus funding or staff—are also expected to decline sharply in the coming year, the survey noted.

A total of 358 U.S. companies, representing "a broad spectrum of industries" participated in the survey, according to Watson Wyatt.

"The difficult business environment and cost cutting of the past several years have caused many companies to change their reward practices, especially the mix of rewards," said Laura Sejen, national practice director for strategic rewards at Watson Wyatt. "While fewer companies see the need for additional cost cutting in the coming year, clearly the nature of the employer-employee deal has shifted."

For example, in light of pending changes in accounting for stock options, more than four out of ten (41 percent) companies have decreased eligibility for participation in long-term incentives. According to Sejen, this weakens the link between employees’ rewards and the long-term financial performance of their companies. It also reduces the opportunity for wealth accumulation, previously an important component of the employment deal in many companies. The survey also noted that 39 percent of companies are making changes to their short-term and annual incentives.

High-performers vs. low-performers. Low-performing companies—those whose financial results are worse than their industry as a whole—are facing profound attraction and retention challenges compared with high-performing companies. According to the survey, low-performing companies report twice the difficulty attracting and retaining top-performers and critical-skill workers compared to high-performing firms.

"High-performing firms clearly do a better job of differentiating pay based on performance," said Sejen. "They effectively use short-term incentives, spot bonuses and other recognition plans to successfully attract and retain top talent."

Indeed, short-term incentives, which top-performing employees rank as the second most valued monetary reward program, offer significant reward potential. Most companies fund short-term incentives based on their financial performance, and according to the survey, high-performing companies funded their incentives at 108 percent of target while low-performing companies were only able to fund incentives at 75 percent of target.

"Unfortunately, top-performing workers at financially weak companies are suffering the consequences. These workers are receiving bonuses that are significantly lower on average than their peers at high-performing companies at 84 percent of funded versus 118 percent of funded respectively. And the gap only becomes wider since low-performing companies are not able to fund their bonus pools to nearly the same degree as financially strong companies," said Sejen.

"To create effective reward programs, companies need to understand where their reward dollars are being allocated," said Sejen. "And the companies that do the best job of linking rewards to business results and employee performance to attract and retain the best workers will be the ones best positioned for future success."

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