Workforce, Benefit Cuts Show Signs of Moderating End of 2009 Says Mercer

As businesses budget for the remainder of 2009, there are signs that deep workforce, pay and benefit cuts are moderating, according to Mercer's latest Leading Through Unprecedented Times global survey.

While the findings reveal continued actions taken by companies to relieve cost pressures -- workforce reductions, salary freezes, reduced contributions to retirement plans and increased costs for health benefits -- equally notable is the fact that organizations generally are not taking actions in response to the economic downturn such as cutting pay and eliminating benefit programs altogether. The findings also show clearly how the economy is having a different impact in different regions of the world and among various industries.

Talent Management

Some 58% of organizations worldwide plan some cuts to their workforce in the remainder of 2009 compared to 66% that had implemented workforce cuts in the six months prior to the survey. Significantly, however, only 5% of these organizations plan deep cuts (more than 10% of staff) in the remainder of the year, compared to 13% that made such cuts in the six months preceding the survey.

The percentage of companies planning layoffs in the next six months varies by region, with less of a change expected in Europe compared to the prior six months. Some 71% of European survey respondents said their companies made workforce cuts in the prior six months and this pace is expected to hold steady in the remainder of the year at 70%. But in Europe, as in other regions, the number of companies planning substantial cuts (more than 10% of the workforce) is expected to drop to 10% of the companies represented from 16% who had such cuts in the prior six months.

U.S.-based companies were more likely to have made at least some workforce cuts in the prior six months (74%), but fewer companies (64%) plan cuts by the end of the year. Some 59% of Asian companies responding to the survey made cuts in the prior six months and are also less likely to make cuts in the next six months (45% of respondents). The number of Asian companies planning significant cuts of more than 10% falls sharply from the number that made such cuts in the prior six months -- from 14% to 4%.

About three-quarters (76%) of manufacturing and technology/computer services companies reduced staff this year compared to firms in finance/banking (69%) and professional services (67%). Manufacturing firms (68%) and technology/computer services firms (67%) are most likely to reduce their workforces the remainder of the year.

Despite the impact of the weak economy, many companies remain focused on their most valuable employees. More than one-third of organizations globally (37%) say they will continue to hire key talent even as they reduce their workforce overall. Approximately another third of organizations (35%) plan to hire talent to replacement levels only, while 15% expect overall workforce reductions and 12% expect to expand their workforces in 2009.

Mercers study also shows that organizations are beginning to use or consider alternative work arrangements to control workforce costs. Ten percent globally have already instituted voluntary reductions in hours with a corresponding reduction in pay, while 12% have instituted such a program on a mandatory basis. Roughly an equal number of organizations are considering similar actions in the remainder of 2009. Popularity of these programs varies by industry. Twenty-nine percent of manufacturing firms have instituted mandatory reduced hours compared to 13% of technology/computer services firms and 3% of finance/banking firms.

Compensation

Organizations globally are almost equally divided on whether their 2009 base pay budgets will be more than their 2008 budgets (31%), equal to 2008 budgets (33%) or less than 2008 budgets (36%).

They have been more likely to freeze pay levels or defer pay increases than to implement pay cuts. In the past six months, 51% froze salaries at 2008 pay levels for at least part of their employee population; 32% froze pay enterprise-wide. Just 30% deferred 2009 pay increases and even fewer (13%) decreased salaries from 2008 levels. Interestingly, more than half of organizations (54%) in the technology industry froze pay company-wide while only 28% of finance/banking firms did. For the remainder of 2009, most organizations plan to freeze salaries at 2008 levels or make 2009 pay increases as planned.

Regarding annual bonus payments, 57% of organizations globally awarded smaller bonus payouts for 2009 (based on 2008 performance) compared to 2008 awards (based on 2007 performance). Just 20% granted higher bonus payments in 2009 compared to 2008.

"As a result of the economic downturn and current labor market conditions, organisations are moving away from pay based on market competitiveness and are, instead focusing on internal affordability," said Steve Gross, worldwide partner in Mercer's human capital consulting business. "Companies need to be careful not to stray too far from market rates of pay or they may find themselves at a significant disadvantage when the economy improves and the labour market becomes more balanced."

Retirement Benefits

With respect to defined contribution retirement plans, 73% of organizations globally do not plan to reduce the level of employer contributions in the remainder of 2009. Notably, 14% of have already done so in the past six months. To date, a third have reviewed their overall fund line-ups (32%) and reviewed both investment and administrative fees (33%), while 43% are likely to take these actions by year-end.

Health Benefits

Although health benefit utilization often increases during a recession, the majority of companies (94%) have not eliminated any current health and group benefit programs to control expenses this year. Instead, most increased employee contributions for health coverage and raised employee cost-sharing of the program. And many organizations plan to do the same for next years health care plan.

Over the past six months, 29% of respondents added wellness programs and another 38% reported that they are likely or highly likely to do so. Just over a quarter of respondents (26%) increased premium contributions. Increased employee contributions are most common in the U.S. (45%) and among organizations with more than 10,000 employees (34%). One-quarter (23%) also has intensified efforts to understand cost drivers. Looking ahead, organizations are very or somewhat likely to turn to the changes they know will produce predictable resultscontinue to increase employee contributions (58%), require cost sharing (50%) and offer lower-cost plan options (41%).

"Coming into 2009, employers turned to time-tested tactics that would have an immediate cost impact," said Linda Havlin, worldwide partner in Mercer's health and benefits consulting business. "Now they are exploring more strategic solutions, including wellness and behavior change, that have the potential for a bigger impact, albeit a longer time horizon."