Watson Wyatt: Employers Reduce Benefit Cutbacks

October 2, 2003 (PLANSPONSOR.com) - Employer cost-cutting measures in employee benefits implemented during the lean times seen in the last year are on the wane.

Only 18% of companies anticipate requiring employees to pay a greater share of benefit costs next year, compared to more than half (56%) that did so over the past 12 months. This comes at a time when only 12% of employers expect a reduction in their salary increase budgets, an action taken by 45% during the past year, according to Watson Wyatt’s 2003/2004 Survey of Strategic Rewards and Pay Practices.

Fewer employers also plan on eliminating or severely cutting bonuses (5% this year versus 16% in the past 12 months), divesting unprofitable units (15% versus 5%) and reducing employee benefits (12% versus 6%). All of this follows a 3.2%-merit increase budget in 2003, a decline from 3.6% in the previous year.

But this does not mean the corporate compensation landscape is not due for some upheaval, as Watson Wyatt senses a change is in the air. “The difficult business environment and cost cutting of the past several years have caused many companies to change their reward practices, especially the mix of rewards,” said Laura Sejen, national practice director for strategic rewards at Watson Wyatt, in a statement. “While fewer companies see the need for additional cost cutting in the coming year, clearly the nature of the employer-employee deal has shifted.”

Paramount among those shifts is in a change in the amount of employees participating in long-term incentives due primarily to how companies plan on accounting for stock options. Forty-one percent of the 358 companies polled in the study have decreased eligibility for participation in long-term incentives.

Instead, companies see more effectiveness in offering short term incentives over base pay and long term incentives, particularly in aligning participant behavior to business goals and improving financial performance. Evidence of this is in the nearly four out of 10 (39%) of firms that said changes are being made to their short-term and annual incentives.

However, Sejen says such a compensation paradigm shift weakens the link between employees’ rewards and the long-term financial performance of their companies. It also reduces the opportunity for wealth accumulation, previously an important component of the employment deal in many companies.

Company Differences

Not surprisingly, the study revealed differences in how compensation and benefits are handled at low-performing companies – those whose financial results are worse than their industry as a whole – versus high-performing companies. Most notable were the profound attraction and retention challenges the low-performers faced when compared with high-performing companies, as much as twice the difficulty in attracting and retaining top-performers and critical-skill workers compared to high-performing firms.

One reason for such a differential was in how short-term incentives are funded. The majority of companies fund short-term incentives based on their financial performance, and according to the survey, high-performing companies funded their incentives at 108% of target while low-performing companies were only able to fund incentives at 75% of target.

“Unfortunately, top-performing workers at financially weak companies are suffering the consequences. These workers are receiving bonuses that are significantly lower on average than their peers at high-performing companies at 84% of funded versus 118% of funded respectively. And the gap only becomes wider since low-performing companies are not able to fund their bonus pools to nearly the same degree as financially strong companies,” said Sejen.

Copies of the Watson Wyatt 2003/2004 Survey of Strategic Rewards and Pay Practices are available at www.watsonwyatt.com .