Cautious optimism about next year's pay round

by

With soaring food and fuel prices hitting wallets daily, the housing market and wider economy slumping and dire predictions of mass redundancies, it's perhaps not surprising many U.S workers are nervous about the future.

Yet, with Swiss bank Credit Suisse beating its own financial forecasts yesterday, so raising hopes that the worst of the credit crunch may finally be behind us and now research by consultancy Watson Wyatt suggested there is unlikely to be a freeze on pay bonuses next year, the picture is perhaps less black than it might at first seem.

The Watson Wyatt poll of nearly 1,400 employers, and 276 from the U.S, found that most U.S firms were planning to give workers merit increases of 3.5 per cent on average next year, identical to those received this year and only slightly below the 3.6 per cent for 2007.

Companies were also planning to provide larger raises to their better-performing employees, with those whose performance ratings exceeded expectations likely to receive an average merit increase of 4.2 per cent.

The highest performers could even be pocketing increases of 6 per cent or more, it added.

Nevertheless, it was not all good news. Half of the firms polled warned that if the downturn continued they might have to start laying people off, with four out of 10 saying their response would be to freeze hiring.

A quarter said they would have to squeeze pay raises and 13 per cent said salary freezes would be their most common response.

"The economy is no doubt taking its toll on workers, but their 2009 merit increases appear safe — at least for now," said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt.

"Employees will view holding merit increase budgets steady as a positive sign that will help them offset inflation and higher energy and food costs," she added.

But it was also clear the economic slowdown was having an effect on companies worldwide, and not just in the U.S.

"If economic conditions continue to weaken, we would expect to see many companies begin to evaluate their staffing levels, pay programs and overall organizational structures and to implement some of their contingency plans," said Sejen.

And it is firms across the water, in the UK, that appear to be among those being hardest hit, research from consultancy KPMG has suggested.

The impact of the credit crunch is hitting UK-headquartered companies much harder than their U.S peers, its study has suggested.

Far more UK companies are experiencing delayed payments from customers, reduced access to credit, increased financing costs and suppliers demanding earlier payment, compared with their U.S counterparts, it argued.

"Given that the credit crunch began in the U.S, it is interesting – and perhaps surprising – to see that UK companies are feeling the pinch more than their transatlantic counterparts," warned Andrew Ashby, director in KPMG Advisory.

"This may be because stakeholders such as banks, shareholders and non-executive directors are being more proactive forcing UK companies to take action before they get into difficulty," he added.

KPMG asked 342 companies with revenues ranging from £250m to more than £20bn about how the credit crisis was affecting their management of working capital.

When asked how they planned to address these cash flow challenges, nearly half said they planned to negotiate longer supplier payment terms, while 46 per cent said they would tighten credit lines to customers.

But such traditional, knee-jerk responses risked making matters worse for all but a handful of firms, Ashby warned.

"Adopting the same old blinkered approach of squeezing your suppliers and delaying payments is a zero-sum game where only few winners will emerge," he said.

"Companies need to be more focused on gaining improved visibility and control of cash and to work smarter across the supply chain to create win-win opportunities that reduce the cash cycle for all participants," he added.

Three quarters of UK companies said they were experiencing delayed payment from customers, against less than a quarter in the U.S.

It was a similar story when it came to reduced access to credit – with three quarters of UK firms and just 14 per cent of US firms reporting it as a problem.

Seven out of 10 UK firms were reporting an increased cost of credit, against fewer than a fifth in the U.S.

Nearly three quarters of UK suppliers were now demanding early payment, compared with just 12 per cent of those in the US, the KPMG poll found.

Nearly nine out of 10 UK companies expected they would have to to delay or revisit refinancing plans in the next 24 months, and nearly half were worried the economic environment would result in increased exposure to bad debt.

But one bright spot was that just four per cent planned to reduce capital expenditure over the next two years as a result of tightening credit market, compared with half of those in the U.S.

"By gaining visibility and control of cash flows, companies will be able to identify the areas where they can generate more cash," said Ashby.

"While working capital tends to be a large area of opportunity companies should also look at cash generation from tax, treasury and other assets on the balance sheet. To drive sustainable improvement, leading companies embed cash management into the strategic decision-making process," he added.

"One way to do this is for companies to incentivise executives to manage cash flow better. Those that do have fared better over the past three years and expect to suffer less in the future," he concluded.

Repost This
comments powered by Disqus

connect with us

you can also . . .


All material copyright © 2000-2014 Management-Issues.com, except where otherwise noted. | Site powered by SedaSoft
Back to TOP

Subscribe to our Newsletter

Sign up for a monthly round-up of the best news, views and ideas from Management-Issues.com. We won't bombard you with junk and you can unsubscribe at any time.

view a sample | privacy policy