Anticipating a Tough 2009: Multinationals Plan Selective Workforce, Pay and Benefits Cuts

By Stephen Miller, www.shrm.org

A significant majority of multinational companies are trying to be selective in planning 2009 workforce reductions and compensation/benefits cuts, even as they anticipate a decline in their company's business performance in 2009, according to a Mercer survey on Leading Through Unprecedented Times .

Conducted in early November 2008, the survey yielded responses from 1,028 HR and finance professionals representing organizations with operations in more than 100 countries. It paints a vivid picture of the challenges that organizations are facing as a result of the global recession. Among the key findings:

• 81 percent of multinational firms expect a decline in their business performance in 2009, and 35 percent are likely to make significant workforce reductions.

• Most are likely to curtail overall hiring, reduce 2009 salary increases and cut bonus payouts while continuing to hire talent to fill shortages in key skill sets.

• A deep or prolonged economic downturn could force more-drastic action.

• Worry about retirement investments tops the list of employee concerns, even outweighing anxiety about job security.

“Many multinational companies have been facing rising cost pressure throughout 2008 and in recent months have been managing compensation costs and workforce levels aggressively," says Patricia A. Milligan, Mercer's chief markets officer. But, as a group, "most of these companies have refrained from taking severe and broad-based steps," she adds. More-drastic actions, for the most part avoided to date, could include deep workforce cuts, across-the-board salary freezes, reductions in defined contribution plan contributions or elimination of certain health benefits programs.

Many fundamental HR-related decisions are likely to be revisited in response to 2008 year-end results and updated economic forecasts for 2009, Milligan says. “This is a balancing act," she notes, and "more-dramatic actions are being considered by boards and senior management should the downturn become deeper or prolonged.”

A Tough Year Ahead

While 81 percent of those surveyed expect their company's business performance to decline in 2009, differences exist by country. The most pessimistic are those with operations in Japan and Hong Kong (90 percent foresee such a decline). The least pessimistic—though hardly optimistic—are those with operations in Canada and the United States, where 72 percent and 82 percent, respectively, expect their company's performance to decline in 2009.

Workforce Reductions: Paring Selectively

Overall, one-third of respondents (35 percent) expect to make significant reductions in their workforces—a relatively conservative response, given the possible depth of the downturn, according to Mercer. The figure does rise to higher levels for certain industries, with 48 percent of manufacturing firms and technology firms likely to reduce their workforces by significant levels vs. 24 percent of professional services firms and 28 percent of retail and wholesale firms.

“While there may not be significant reductions across the workforce in some industries, our experience indicates that many companies are trimming staff selectively and strategically by reviewing staffing in specific workforce segments, business units or geographies,” says Milligan. It's likely, she adds, that "companies learned important lessons in previous economic downturns about the importance of talent in creating competitive advantage and so are reluctant to take actions that could hamper their recovery once the economy improves.”

On the other side of the coin, despite the weak economy, talent shortages still exist for key skill sets, and selective hiring remains a top priority for employers. While more than two-thirds of respondents (69 percent) will likely curtail overall hiring to below replacement levels, 69 percent will likely hire top talent at originally planned levels.

Seventy percent of respondents do not expect to reduce the number of staff on international assignments, as these employees are often sent to high-growth markets. However, 42 percent expect to review international assignment programs and policies as part of expense control.

Compensation: Cold but No Freeze

The majority of respondents (73 percent) are likely to reduce salary increases in 2009 from those originally budgeted. Only 12 percent said freezing wages at 2008 levels is a highly likely course of action, but it is a stronger possibility in some industries, notably banking and technology. Among other compensation findings:

• 60 percent of multinational firms expect to reduce 2009 bonus payouts based on 2008 performance—a figure that is likely to increase after year-end results and 2009 business forecasts are finalized. A substantial 75 percent of financial firms are likely to reduce 2009 bonus payouts.

• 15 percent of all respondents plan to change or develop new variable pay programs. The response is almost twice as high among financial firms (28 percent).

Retirement Benefits: Holding Off on Cuts

Regarding 401(k) and other defined contribution plans, 83 percent of respondents do not expect their company to reduce the level of employer contributions. But 17 percent are considering doing so. For defined contribution plans, respondents expect to:

• Enhance employee education and communication regarding investment choices, objectives and options (85 percent of respondents).

• Review investment and administrative fees, possibly attributable to pressure from regulators as well as the decline in investment values (77 percent).

• Review their fund lineups (75 percent).

For defined benefit pension plans, the focus is primarily on understanding and reducing risk:

• Changing investment strategy (46 percent) is the most likely method companies will take to reduce risk, rather than changing funding policies (31 percent).

• Nearly one-quarter (24 percent) are considering cutting back or stopping accruals, but only 4 percent say they are very likely to do so.

Health Benefits: Employee Contributions Likely to Rise

Recessions typically lead to an increase in health benefits usage by employees and, thus, an increase in the cost of such programs to employers. However, 84 percent of survey respondents said their company is unlikely to eliminate any current health or group benefits program to cut expenses. Instead, they are more likely to:

• Intensify efforts to understand the root causes of increasing costs (77 percent).

• Add wellness programs to improve health-related behaviors and increase employee engagement (76 percent).

• Increase employee contributions (53 percent), particularly those representing companies with operations in the United States (67 percent).

Specifically, some 59 percent of companies operating in the United States might shift more health costs to employees through such mechanisms as higher deductibles, vs. a survey average of 47 percent.

Employee Attitudes: High Anxiety

Given the nature of their jobs, HR professionals have a special perspective on changes in employee sentiment, so the survey asked respondents to gauge employee concerns related to the economic turmoil. Among the findings:

• 54 percent said their employees had expressed a significant level of concern about the impact of economic turmoil on their retirement investments.

• 37 percent said employees had expressed significant concern about the health of the company.

• 34 percent said employees had a high level of anxiety regarding their job security.

“Employee concerns can lead to a decline in engagement and productivity and so need to be closely monitored and addressed,” notes Milligan. “Employee communication efforts should specifically and consistently address economy-related matters to help companies and their workforces through these unprecedented economic times.”

HR: Coping with Fewer Resources

At a time when their company's performance is under pressure, HR leaders often feel a responsibility to improve operational effectiveness and to drive broader organizational change and transformation. In an environment in which they are asked to operate with reduced resources:

• 75 percent of respondents said they are "not likely" to invest more to outsource HR functions in 2009.

• 62 percent are "likely" to reduce planned investments in HR services.

• 21 percent are “highly likely” to make such cuts.

Stephen Miller is an online editor/manager for SHRM.

Source: http://www.shrm.org