From the March 2009 issue of Ceridian Connection.

As the news continues to feature headlines announcing company closings, massive layoffs and wage freezes, fewer and fewer companies are immune to the challenges that today's economy is placing on how they pay for talent. As salary budgets are hitting historic lows, health care costs are increasing. Employees are feeling the squeeze as their paychecks dwindle.

Today's economic climate has led a number of employers to reserve the bulk of their pay raises for their top producers in an attempt to use their payroll budget more shrewdly. This strategy, referred to as incentive compensation management (ICM), provides an incentive to its most productive employees and a "carrot" for those who could contribute more.

"Labor costs are a significant expense," says Jane Linden, Ceridian Compensation manager. "Most company CFOs and CEOs are asking human resources departments how they can best manage their compensation budgets. Many organizations are instituting wage freezes or giving raises by exception only. And they want to reward their top performers if they have money in their compensation budget."

Wage war
The downturn in the economy is forcing most companies to take a hard look at their compensation and incentive programs to find ways to cut costs. In the coming months, employees at many companies will see reductions in 2009 merit pay increases according to a Towers Perrin survey of human resource executives and staff in more than 450 companies.

Key findings from the survey indicate that:

• Only 16 percent of U.S. respondents view large-scale layoffs as likely, while 62 percent expect to freeze or reduce hiring and almost half (46 percent) expect or plan targeted workforce reductions aimed at low performers and those in less critical roles.


• Over half (54 percent) of the companies surveyed report concern about the risk of losing high-performing employees as a result of taking measures such as cuts in bonuses or pay increases. These companies said they would consider the following actions to retain talent: salary increases (41 percent), cash retention awards (30 percent), stock retention awards (24 percent) and higher bonus payouts (22 percent).


• Nearly four out of every ten companies have adjusted their 2009 salary budgets downward as a result of the financial and economic turmoil. Only 6 percent of all companies surveyed plan to freeze their 2009 salary budgets for employees below the executive level, while more than twice as many (15 percent) plan no increases in executive salaries next year.

A recent article from Workforce Management confirms the trend for most employers to hold their salary budgets steady for 2009. The article summarized findings from studies conducted by Hewitt (411 organizations), Watson Wyatt (248 organizations), Mercer (190 organizations, based on prior WSJ article), World at Work (members only, 698 members responding to a Quick Poll) and BLR (Business & Legal Reports) (518 organizations):
Percent of employers planning to decrease their 2009 salary increase budget-

• Hewitt study: 42 percent


• Watson Wyatt study: 28 percent


• Mercer study: 42 percent


• WorldatWork poll: 33 percent


• BLR study: 39 percent

Adjustments to planned 2009 salary increase budget -

• Hewitt study: Down an average of 1.0 percent to 3.1 percent for hourly and salaried exempt


• Watson Wyatt study: Down on average to 2.5 percent from 3.7 percent


• Mercer study: Down on average to 3.6 percent from 3.7 percent


• BLR study: Down on average to 2.8 percent from 3.7 percent

Plans for a salary freeze -

• Hewitt study: 15 percent considering a salary freeze


• Watson Wyatt study: 4 percent have already implemented a salary freeze, 12 percent will do so in the next 12 months


• BLR study: 25 percent considering a freeze on all raises

Economies of pay scale
More than ever, companies are concerned about how their compensation dollars are spent. Many will have to rethink their compensation budgets.

"The communication of economic challenges is an opportune time for financially stable companies to tell their employees that they are taking care of them," adds Linden. "When the economy recovers, this can help ensure that employees are committed to the organization, resulting in long-term retention. On the other hand, companies that are weathering the economic storm may be wondering if there is enough cash on hand to cover payroll. And in times when companies are trying to be more thoughtful about how they use their compensation budgets, a system to help manage incentive compensation to reward top producers is important."

Implementing a true pay-for-performance culture can be wrought with obstacles and challenges. Many organizations rely on compensation planning processes that are prone to errors, difficult to coordinate, and fail to establish a direct link between compensation and employee performance. Tracking down the correct spreadsheet version through a maze of e-mails is an all too common occurrence resulting from inadequate tools. These issues can lead to consistent guidelines and disparities in compensation that destroy employee morale and hinder productivity.

Ceridian Talent Management solutions streamline the compensation process and help organizations execute strategies that motivate and reward employees based on their achievements -- ensuring a true pay-for-performance culture. Ceridian Talent Management decreases the administrative burden associated with managing the compensation process and reduces the number of errors. Ceridian's solution helps organizations achieve pay-for-performance initiatives, streamlines the compensation cycle, ensures compliance with corporate compensation policies and allows managers to perform "what-if" scenarios to analyze the budget impact of allocating higher merit increases to top performers.

As a service to help employers and the public, Ceridian's LifeWorks Employee Assistance Program is making several resources available to help Americans cope with economic issues in 2009.
Resources for employees