Money Talks

Money talks.

Section: SPECIAL REPORT: COMPENSATION & SALARY FORECAST
Ongoing salary cuts and freezes send a sour message that threatens performance and productivity. Compensation experts recommend restoring base pay and merit increases to pre-recession levels as quickly as business results allow
COMPANIES THAT froze salaries at 2008 levels should unfreeze them as soon as businessconditions allow and grant merit increases in 2010, top compensation experts now advise. Companies that cut salaries in 2008 or 2009 should restore them as soon as possible and add merit increases in 2010. Without these measures, the already dramatic decline in employee engagement may undercut the potential for revenue growth and profitability.
Surveys indicate that 50 to 75 percent of employers frozeor cut base salaries during the recession; many also report an unprecedented drop in employee commitment and loyalty. Watson Wyatt Worldwide's 2009/2010 U.S. Strategic Rewards survey found that engagement has dropped 9 percent among all employees and 23 percent among top performers — those who ranked in the top 10 percent in their last performance review. More than 40 percent of top-performingemployees report that their employer's pay and benefit cost-cutting actions have had an adverse impact on work quality and customer service.
"The drop in engagement is directly tied to the pay and benefit cuts," says Laura Sejen, global director of strategic rewards consulting at Watson Wyatt in New York. "Engagement is related to the experience at work. It is not a broader response to externalevents." Watson Wyatt's 2009-2010 rewards report concludes that employers have created significant attrition risk among top-performing employees.
The retention risk is real for top performers, who retain mobility even in soft labor markets. But with unemployment now forecast to peak at more than 10 percent in early 2010 and remain above normal levels until 2013, many employees will be forced to stayon the job despite high levels of pay dissatisfaction. Their ongoing demoralization reduces the prospects for improved corporate performance.
"The disengagement issue is a prime concern for employers in the context of pay freezes and cuts," notes Loree Griffith, a principal in Mercer's New York office. "The myth is that employers can put in reductions without consequences." In 2010, the centralcompensation task will be to reverse freezes and cuts and address the disengagement that followed in their wake.
UNFREEZE, RESTORE
Watson Wyatt has closely tracked employer actions in response to the recession with bimonthly surveys since the crash in the fall of 2008. The strategic rewards survey reveals the full cumulative effects of a year of cost-cutting actions. Seventy-two percent ofemployers have restructured or laid off employees since the recession began. Firms have cut headcount by an average of 9 percent. Even high-performing firms — companies performing above their peer group — have laid off an average of 7 percent of their workforce.
Sixty percent froze salaries, including 54 percent of high-performing companies; 15 percent cut salaries, including 15 percent ofhigh-performing firms. Twenty-four percent cut bonuses; 17 percent cut or eliminated the 401 (k) match; 13 percent reduced other benefits. The Watson Wyatt survey results demonstrate that the drop in employee engagement is closely correlated with the number and type of cost-cutting actions that companies implemented during the downturn. In organizations where companies took a number of restructuring actions,engagement dropped precipitously.
"The drop in engagement is a significant downward shift," Sejen says. "Normally, we might see a 5 percent swing in engagement levels from year to year. The 23 percent drop in engagement among top-performing employees is a warning to employers that they must reverse pay and benefit cuts, starting with base pay. Base pay is always among the top five factors that...