Welcome to the new austerity

Dec 15 2008 by Nic Paton Print This Article

For any manager who actually got a bonus this year, the best advice is probably "don't spend it all at once, because it may be the last one you get for sometime".

According to a survey by consultancy Watson Wyatt, 2009 will the year many U.S firms take a hatchet to their executive bonuses, with almost half planning to reduce the size of their bonus pool.

Of those, 30 per cent said they would be making cuts of up to a fifth and 35 per cent would be cutting back by between a fifth and a half.

Nearly a quarter said they were expecting to reduce bonuses and long-term incentives by at least half, with 11 per cent taking the radical step of not paying any annual bonus at all.

The survey came at the same time as a poll from management consultancy Hay suggested the economic picture for next year remains unremittingly grim.

It found the number of firms expecting their business results to be significantly worse than for 2008 had more than doubled since March.

Back in March, just 12 per cent of firms were gloomy about their prospects for the year ahead, a figure that had now jumped to 31 per cent.

However, it is probably worth recognising that this still meant more than six out of 10 of the more than 2,500 firms on six continents felt their business results for 2008 would stay the course and be close to their targeted levels.

In fact, just nine per cent of African companies and 12 per cent of their counterparts in the Middle East expected their results to be significantly below target.

Overall, retail was expected to be one of the hardest-hit sectors, with nearly two thirds of retailers polled expecting poor business results.

But other industries, such as oil and gas, had been able to weather the downturn more successfully, added Hay.

Nevertheless, even if the impact of the downturn was not being felt consistently around the globe, next year was likely to be one of increased staff freezes or cuts and lower base salaries, Hay agreed with Watson Wyatt.

Nearly half of those firms polled said they were decreasing or freezing existing staffing levels, up from the fifth reported in March.

Among those planning lay-offs, the average decrease was 7.5 per cent, with just three per cent of firms globally planning to increase staffing levels.

Nearly two thirds of firms were making changes or considering changes to their previously established base salary increase budgets for 2009.

Of those, more than half were decreasing their budgets and nearly a quarter freezing or considering freezing salaries for all employees.

At the same time, training and development programmes were being decreased or eliminated by 16 per cent of the organisations sampled.

A tenth of firms were cutting overtime wages and 17 per cent slashing the use of contract labourers.

However, most were keeping benefits programmes, including health and retirement plans, relatively intact at this time, Hay added.

By and large, companies were going into 2009 expecting hard times, explained Ira Kay, global director of executive compensation consulting at Watson Wyatt.

"Given the enormous pressure to respond to shareholders, who have been hit hard by the economic crisis, it's no surprise that all aspects of executive pay programs are being scrutinized," she pointed out.

Almost one in four companies expected the dollar value of their long-term incentive grants to decrease in the next year, most likely as a consequence of the recent fall in the equities market.

In terms of other long-term compensation vehicles, companies were putting less emphasis on stock options and relying more on performance-based restricted stock in the coming year, she added.

The Watson Wyatt poll also found that nearly one in four companies had frozen or expects to freeze executive salaries within the next year, with four out of 10 decreasing or expecting to decrease planned merit increases.

More than a fifth had reduced or planned to reduce perquisites, while 14 percent have added or plan to add clawbacks.

"It's a challenge to provide meaningful incentive opportunities in the current environment," admitted Andrew Goldstein, North American co-leader of executive compensation consulting at Watson Wyatt.

"Companies face a difficult balancing act Ė reducing pay programs in response to a very challenging economy, while continuing to retain and motivate key executives," he added.

Other findings from the research included that nearly a tenth of companies had added, or expected to add, a special retention bonus, with an additional fifth considering doing so.

Employees, added Hay, were most worried now about their job security, with fear of being laid off one of the top concerns, along with the effect of reduced bonuses and frozen salaries.