2009 Canada HR Cuts More Severe Than Predicted

December 7, 2009 (PLANSPONSOR.com) – A new Towers Perrin Canada survey shows employers ended up more severely slashing operating costs in 2009 than originally anticipated and that their optimism about a 2010 recovery is muted.

A Towers Perrin news release said executives participating in the poll were divided in the timing of an expected recovery; a third each predicted the next eight months, late 2010, and 2011 or later.

As a result of the uncertainty, companies are being conservative with their salary budgets. The median salary increase for employees is 2.5% — an increase relative to 2009 for many companies, but down about 1% from pre-crash norms in Canada. Although nearly half of the 143 Canadian companies surveyed froze salaries in 2009 (a much higher proportion than was anticipated in a similar January 2009 poll), only 11% predict a general salary freeze for 2010 (that number increases to 18% when it comes to senior executive salaries).

Plans to reduce workforce costs in other areas look very different compared to 2009, with fewer companies looking to reduce costs further in areas such as salary reductions, training, benefits, and overtime. Further, the number of companies planning significant workforce reductions in 2010 is far lower than 2009 (10% rather than 34%).

“In the current environment, it’s not surprising that companies are exercising caution about returning to pre-crash levels of compensation,” said Fiona Macdonald, managing principal with Towers Perrin. “In fact, this period may signal a new approach to compensation altogether, with companies rethinking their total compensation policies and budgets and implementing better pay-for-performance linkages across the organization, not just in the executive suite.”

Bonus Effects

At both executive and general employee levels, the downward pressure on bonuses will continue for the second consecutive year. More than half of respondents anticipate lower or no bonuses for 2009 with the following projections: about 10% of companies will have zero bonuses for the second year running; half will be the same or somewhat less than last year, and approximately 25% will be significantly lower. Only 15% intend to pay higher bonuses than last year.

Overall, salaries are flat, or up modestly, target bonus levels are unchanged, and actual bonuses are flat or down in most cases, the news release said.

The most significant change at the management level relates to long-term incentives, traditionally used by companies to align management and shareholder interests. The findings show that the theoretical value of long-term incentives granted in 2009 is less than in 2008.

Talent Retention

In a related area, the poll found that nearly seventy percent of companies in Canada are concerned about retaining their high performing critical talent as a result of cutbacks made during the recession, and especially as pay stagnates for a second year. This talent flight concern appears warranted as many companies indicated that they plan to increase hiring next year, and will almost certainly look at competing organizations in their industry or region as a possible source of talent.

Companies are taking measures specifically to retain top talent, including greater pay differentiation through targeted salary increases (55%), differentiated bonuses (21%), and retention awards in cash (29%) or stock (25%). In addition, 40% of respondents are responding by enhancing their talent management programs.

Towers Perrin's most recent compensation and hiring research was conducted online in late October 2009. In total, 143 respondents provided information on their Canadian operations.