Credit crisis crunches Christmas

Dec 13 2007 by Nic Paton Print This Article

The traditional holiday bonus is all but disappearing in America, with nearly two thirds of firms saying they do not intend to offer their workers a Christmas windfall this year.

At the same time, the credit crunch and tougher economic climate in the U.S is prompting many workers to take out so-called "hardship withdrawals" from their pension funds, in the process risking their future retirement income.

A survey from HR consultancy Hewitt Associates has concluded that 63 per cent of companies will not award a holiday bonus to their staff this year.

Nevertheless, nine out of 10 of the 350 companies polled stressed they did pay workers performance-based bonuses that had to be re-earned annually.

"Companies continue to realise the value of performance-based awards as a way to motivate and reward employees," said Ken Abosch, North American compensation practice leader at Hewitt.

"Tying rewards to business performance keeps employees connected to the overall business strategy, and, in the end, is more meaningful than a 'feel good' holiday bonus," he added.

Its study found more than half never offered a holiday bonus, while a tenth had discontinued their programmes.

Of those that cancelled their holiday bonus initiatives, half had done so in the past seven years.

Companies said they had eliminated holiday such bonuses primarily because of cost, the development of alternative pay-for-performance programmes or because of difficulty in administering such bonus programmes.

Of those companies that never offered a holiday bonus programme, more than half said all rewards were tied to performance, a third said it was down to cost and more than a quarter had never considered such a programme.

Of those providing bonuses, four out of 10 said they would provide gift cards or cash, a quarter would give a gift such as a turkey or ham and a fifth said they gave a catalogue gift.

The insurance industry was the most likely still to give these sorts of bonuses, followed by healthcare, manufacturing, retail, financial services and the pharmaceutical industry.

This year actual company spending on variable pay as a percentage of payroll was 11.8 per cent, with spending on variable pay next year projected to remain strong at 11.6 per cent, Hewitt added.

"Variable pay is one way that employees can make up for a lack of holiday bonuses," said Abosch.

"In fact, if company goals are met or exceeded, many employees can expect to earn far more than what they would receive in the form of a holiday bonus," he added.

But for many workers, the economic slump is not only cutting into bonuses but forcing them to take drastic measures just to keep financially afloat.

A poll by Duke University and CFO Magazine of 573 finance chiefs in the U.S. and 1,275 globally has found that year-end employee bonuses will fall by a tenth this year compared with 2006.

And nearly a fifth had seen increased hardship withdrawals from 401(k) pension accounts, often to cover mortgage payments or to avoid personal bankruptcy.

"In the last four or five months we have seen an absolute onslaught of people trying to do hardship withdrawals and loans out of 401(k)s," Mark Anderson, chief finance officer of Granite City Electric, told CFO magazine.

"What has happened with housing and the economy has really blown up for people at the lower end of the spectrum," he added.

And there is more tough news for those workers solely reliant on a company pension for their retirement income.

Future generations retiring on company pensions alone may, in many cases, retire on "poverty incomes", accountancy firm PricewaterhouseCoopers has warned in an annual review of UK pay trends.

Increasing levels of incentives have been accompanied by a marked decline in the number of defined benefit pension schemes, it said.

For many, combined employee and employer contributions are often barely more than a tenth of salary, it found.

This meant an employee would be lucky to retire on half as much as they would have in a final salary pension, it said.

Tom Gosling, partner at PwC, said: "The risks for corporate reputations and succession planning are severe. Large numbers of employees retiring on poverty incomes will not be an acceptable risk for a responsible employer's reputation.

"There are also implications for succession planning where attempts to freshen up the talent pool will be frustrated by employees who cannot afford to retire and who now receive greater protection through age discrimination legislation," he added.

Providing financial planning education to employees would be a key step in tackling this situation, Gosling argues.

Closer links with such as save as you earn schemes and other company share plans could also be a good idea.

"Companies may be under the impression that transferring the risks to employees has removed the pensions headache but many will be in for a much worse hangover in a decade's time if they do not address this now," warned Gosling.

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