Stamford, Conn. — Current economic pressures are forcing many companies to take a hard look at their compensation and incentive programs to find ways to cut costs, according to survey findings released today by global professional services firm Towers Perrin. Contrary to past economic downturns, however, the focus on mass workforce reductions has shifted to more targeted, strategic workforce reductions and cuts in other discretionary spending, the firm says.

The "pulse" survey of more than 450 companies from a range of industries, including insurance, and sizes was conducted in mid- to late October 2008, and provides the most current insights into how U.S. companies are thinking about the workforce and compensation trends in response to recent economic turbulence.

"The commitment to the retention of key talent is a significant shift from past national recessionary periods, when a slash-and-burn mentality reigned," says Ravin Jesuthasan, managing principal in Towers Perrin's Chicago office and a leader of the firm's Rewards and Performance Management practice globally. "Companies are entering this period with leaner workforces and the knowledge that across-the-board mass layoffs can create significant long-term problems."

The study found that 66% of respondents believe a significant reduction in head count at their organization is somewhat or very unlikely, while 46% think a more targeted head count reduction is probable. Nearly half (49%) of those polled are somewhat or very likely to reduce pay/merit increase budgets, and nearly four out of 10 (39%) are considering a reduction in annual incentives and bonuses.

While cuts to bonus and salary increase pools may be preferential to mass workforce reductions, organizations recognize the importance of rewarding key talent and honoring bonus commitments in some form, Towers Perrin says. Fifty-four percent of those polled are somewhat to very concerned about turnover of their high-performing and business-critical employees as a result of the way the organization handles the economic crisis. To address this issue, many organizations are taking a proactive approach: 30% are considering cash retention awards and 41% are considering targeted salary increases to help retain and motivate top performers.

Organizations are taking other noticeable steps to cut discretionary costs in 2008 and 2009 without affecting long-term success. More than half of all organizations polled (58%) acknowledge they are somewhat or very likely to scale back this year's holiday party and other employee events to save money. Seventy-four percent plan to cut spending on travel and entertainment, and 47% plan to cut training budgets.

"Companies appear to have the experience, tools and skills to address these economic challenges in a responsible and rational way," Jesuthasan says. "The strategic and surgical approach to cost-cutting revealed in this survey indicates that organizations have learned from prior periods of economic crisis. They are poised to successfully work through this turbulent time, retain and reward their pivotal talent and top performers, and position themselves for future growth."

Executive Compensation Issues

The survey also shows that most companies are still considering the significant issues the recent stock market and economic turmoil pose for executive compensation strategies and programs. For example, even though 85% of the respondents report that their company's shares are trading more than 15% below last year's levels, and almost 60% report that their stock price has declined by 30% or more, more than half of the companies surveyed report that no final decisions have been made on how their long-term incentive grant methodology may need to be adjusted to reflect the change in stock price. Even fewer have decided how or if they will address underwater stock options.

Similarly, while just over half (53%) of the survey respondents have decided to leave their long-term performance targets unchanged despite recent events, many (42%) are considering the implications of making adjustments, and a few (5%) are already planning to make adjustments to reflect the new economic realities. Decisions about whether and how to adjust performance targets hold added importance, with more than half of the survey respondents forecasting lower bonuses for 2008 performance than for 2007.

Source: Towers Perrin

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