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Companies Fine-Tuning Bonus Plans

Companies Fine Tuning Bonus Plans | Human Resource Executive Online Recent surveys show that employers are trimming bonus budgets, but not necessarily reducing rewards for top employees they are most concerned about retaining. Communication with employees is crucial, experts say.

Monday, December 1, 2008
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Unsurprisingly, employers affected by the economic crisis are trimming their bonus budgets. But according to recent surveys, it looks as though they're using surgical knives, not chainsaws.

Many employers are differentiating between superior, average and poor performers, and awarding bonus pay -- or not -- accordingly. Many are taking other steps before touching bonuses.

Four in 10 companies (41 percent) said they are very likely to respond to the economic crisis by cutting travel and entertainment spending, according to a Compensation in Crisis survey by Stamford, Conn.-based HR consulting firm Towers Perrin that polled HR executives and others at more than 450 companies in the United States.

More than one-third (36 percent) are very likely to freeze or reduce hiring, and only 18 percent are very likely to reduce bonuses.

"The commitment to the retention of key talent is a significant shift from past national recessionary periods, when a slash-and-burn mentality reigned," says Ravin Jesuthasan, managing principal in Towers Perrin's Chicago office.

"As companies wrap up a difficult year, it's a positive sign that most plan to meet their existing bonus commitments to employees," says Jesuthasan. "This commitment will go a long way toward preserving employee trust and engagement."

E. James Brennan, a senior associate at ERI Economic Research Institute, a Redmond, Wash.-based compensation and benefits research firm, says that, while employers are planning on smaller rewards budgets for next year, "they are giving close examination to their super-keepers."

His advice to employers facing a financial squeeze: "Don't give your best people the impression that you will treat the average employee the way you treat them."

Average employees, says Brennan, know they're lucky to have jobs. "And you can't afford to retain poor performers."

The coming months will be tough for employers trying to balance the economic crisis with the need to reward and motivate employees, says Tom McMullen, U.S. rewards practice leader of Philadelphia-based HR consulting firm Hay Group.

"Times like these can prompt knee-jerk reactions and irrational decisions that can leave employees with a bad taste in their mouth," says McMullen. 

"Companies need to avoid making hasty decisions due to current economic situations, and consider the longer-term effects on employee engagement, motivation and performance," he says. "Many companies are being more prudent with compensation and bonuses, but if employers don't play their cards right, they may find themselves without a full house when the economy turns around."

An October 2008 survey, Effect of Economic Crisis on HR Programs, conducted by Washington-based HR consulting firm Watson Wyatt, found that more than one-quarter (28 percent) of polled companies are revisiting merit-increase budgets for 2009.

Laura Sejen, Watson Wyatt's director of strategic rewards, says the survey of 248 U.S.-based companies also found a 14 percent bonus-pay decrease from last year.

"My own view," she says, "is that that number is likely to grow."

She says she is telling her clients, "What is a best practice during normal times is critical during an economic crisis, so put a laser focus on how you target your bonus dollars. It's important to redouble your efforts around communication."

Most important, says Sejen, is to make sure your performance-management program is effective and that line managers make good decisions.

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It's a good time for HR to review the company's manager-training materials and make sure managers are communicating to employees about bonus pay, she says.

"Make sure employees understand how the economic conditions affect business. Make sure everyone is focused on that so you get alignment between [your bonus program] and your performance-management program."

According to Mercer's 2008/2009 US Compensation Planning Survey Update, short-term incentives for 2008 performance are projected to decline 20 percent or more. The largest hit: the executive level. The C-suite is expected to earn bonuses averaging 35 percent of base pay, down from 40-plus percent in 2007.

Steve Gross, who leads the rewards strategy consulting practice for New York-based Mercer, says the 190 mid-size and large U.S. employers surveyed by the HR consultancy "are reporting a decline in bonuses across the board."

He agrees that special attention should be paid to employee communications.

"If you are in an organization where you share what happens over the year, people can see. They know what's going on."

But, for most organizations, communication is a problem, says Jack Dolmat-Connell, CEO of the Waltham, Mass. compensation consultancy DolmatConnell & Partners, noting that "90 to 95 percent of small to mid-size firms don't communicate well [with employees] ... so the workforce figures things are going well."

He's been advising clients to tell employees the truth and manage their expectations.

And, he says, it's a good time to consider awarding stock options. He acknowledges that some people are wary of options because they got burned in the dot-com crash. At this point, however, "there is a lot of upside. Share prices are so battered they won't fall much more."

Dolmat-Connell also recommends migrating from an annual bonus plan to a six-month plan. "If you don't have visibility 12 months out, don't do a 12-month plan."

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