1 Reward in a downturn. Reward. in a. downturn

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1 1 Reward in a downturn Reward in a downturn Hay Group global survey April 2009

2 2 Reward in a downturn Contents Executive summary 3 About the survey 4 Findings reward in a downturn 5 Imapct deepening around the world 8 Counting the cost business and people imapcts 9 Summary findings US 12 Summary findings South and Central America 13 Summary findings Europe 15 Summary findings Asia 19 Summary findings Pacific 22

3 3 Reward in a downturn Executive summary The March 2009 Reward in a downturn survey reveals a deepening recession that has become truly global, and which is affecting the pay, benefit and job prospects for employees at all levels throughout the world. Pay has been affected in all countries, with salary increases at or below inflation rates, even in previously fast-growth economies. Salary freezes have become very common with employees in 36% of companies globally facing salary freezes, and actual or proposed salary cuts looming for others. The pace of change is also remarkable, with a sharp decline in business confidence and the severity of impact on reward practices since our last survey. Projected salary increases for 2009 have fallen to only 2.8% down from a projection of 4% only four months ago. Around the world, 27% of organizations are decreasing their staffing levels, compared to 17% in November Many organizations which a year ago were having trouble filling vacancies are now having to resort to job cuts. In contrast to recent years, executive pay is likely to rise even less than that of their employees and in practice many executives will receive significantly less than in previous years, as bonus pay-outs drop and the value of share-based payments is hit by stock market falls. In such a difficult environment, organizations top concern is maintaining employee engagement. When doing more with less, the discretionary effort of employees willing to go the extra mile is even more critical for surviving the downturn and being positioned to grow once the environment is more favorable. Similarly, organizations are concerned about retaining their high performers in order to get through the downturn and take full advantage of the upturn when it comes. However, employers can t afford to pay more on reward. But employees work for more than money: they work to get training and career development, to make a valuable contribution, and because they enjoy contributing to a common vision and making their place of work a better place to be. Leading organizations understand this and are focusing on improving non-financial aspects of reward, even if financial rewards are being squeezed. Based on the trends shown in this and previous surveys, if the global downturn continues to deepen then the following scenarios are real possibilities for the rest of 2009 and beyond: An increasing number of companies will impose salary freezes A growing number of employees will face the choice of either accepting pay cuts or facing job losses Pay-out levels from bonus schemes will fall further Companies will increasingly look to cut their contributions to pension schemes, and the trend away from defined benefit schemes will accelerate Other benefits (such as medical insurance, car schemes etc) which have been spared review so far, will come under scrutiny. In a growth market, some companies were able to take a simplistic approach to pay, relying largely on benchmarks (internal or external) plus set annual increments to determine salaries. The downturn will force many of those companies to adopt a more strategic approach to reward based on their strategic goals, ability to pay and critical talent needs, in addition to market comparability.

4 4 Reward in a downturn About the survey A total of 2000 organizations from 88 countries across six continents participated in Hay Group s Reward in a Downturn survey in March This is the third survey in the series, with the first conducted in March 2008 and the second in November The results show clear trends in the downturn s impact on reward practices globally and in significant economies around the world. Data collected in the research survey includes organizational changes to base salary increases, shortterm and long-term incentive programs, as well as changes to other reward-related programs (e.g. benefits plans, staffing and work rules programs and training and development programs). Typical respondents to the survey include top HR and reward executives within medium to large size organizations across a wide range of industries. For more information on the survey, including details on results for individual countries or industry sectors, please contact your local Hay Group office, or rewardservices@haygroup.com.

5 5 Reward in a downturn Findings reward in a downturn The global downturn continues to deepen, with the impact on reward programs becoming more significant and widespread. Compared to our last survey in November 2008, companies are now projecting salary increases in 2009 of 2.8% compared to a forecast of over 4% only four months ago. What is more, at least 25% of all employers globally are projecting zero pay increases across the board in In a significant reversal of past trends, executives are forecasted to receive the lowest level of salary increases 1.5% compared to 2.5% for clerical/support roles. This is in stark contrast to a long history of executive pay outpacing wage growth at other levels. Table 1 What is your organization's base salary increase for 2009 as a % of base salary? (Global respondents) First quartile Median Third quartile All employees 0.0% 2.8% 5.0% Executive 0.0% 1.5% 4.5% Management/professional 0.0% 2.5% 5.0% Support/clerical 0.0% 2.5% 4.5% Blue collar/skilled trade 0.0% 2.2% 4.2% High performers/potentials 0.0% 3.0% 6.0% Organizations are also taking a variety of other actions to reduce costs, with the most common being restructuring to reduce staffing level, temporary pay freezes, promotion freezes and reducing benefits. Table 2 Is your organization taking any other actions to reduce its salary spend? (Global respondents) Utilising Considering Utilising/ considering Organization restructuring to reduce staffing levels 22.6% 19.2% 41.8% Temporary pay freeze 23.1% 14.5% 37.6% Promotion freezes 9.7% 15.0% 24.7% Reduced benefits (other than retirement) 7.1% 15.4% 22.5% Reduced incentives that are otherwise earned 7.3% 14.1% 21.4% Job sharing 6.0% 11.7% 17.7% Early retirement packages 7.4% 9.6% 17.0% Increasing co-pays on benefits programs, and scaling back on employer paid coverage. 5.8% 11.1% 16.9% Voluntary reduced work week/working hours, with reduced pay 3.1% 12.4% 15.5% Voluntary unpaid leave / unpaid sabbaticals 3.9% 10.8% 14.7% Enforced reduced work week/working hours, with reduced pay 3.9% 10.3% 14.2% Other 3.7% 8.6% 12.3% Voluntary/negotiated salary cuts 3.0% 7.7% 10.7% Reduced retirement benefits 4.4% 6.3% 10.7% Temporary salary cuts 2.7% 7.5% 10.2% Enforced unpaid leave / unpaid sabbaticals 1.9% 6.6% 8.5% Compulsory salary cuts 2.3% 5.6% 7.9%

6 6 Reward in a downturn Executive pay hit hardest, but job restructuring highest for white collar employees Globally, executive positions are more likely to face a salary freeze than other employee groups. In many cases, the organization s leadership has decided to model behavior by not taking pay increases, and have asked senior staff to demonstrate similar restraint. The survey shows that in 42% of companies, temporary pay freezes are in place or in the process of being considered for executive positions compared to 28% for blue collar/skilled employees. Actual salary cuts are also highest at the executive level: for executives, 12% of companies are utilizing or considering voluntary salary cuts, 8% are utilizing or considering compulsory cuts, and 11% are utilizing or considering temporary salary cuts. This compares to 8%, 6%, and 8% at the blue collar/skilled worker level. However, organizational and job restructuring to reduce staffing levels is highest amongst white collar employees 46% of companies are considering such restructuring compared to 36% at executive levels. Given the much higher numbers of employees in these populations, organizations are likely to obtain more overall labor cost savings in these employee groups than in the executive ranks. HR programs hitting the chopping block Training and development programs are being decreased or eliminated by 27% of global respondents. Companies are also cutting overtime wages (19%) and the use of contract laborers (30%). However, most are keeping their benefits programs relatively intact for now. Few organizations are eliminating or decreasing health care benefits (5%) or savings plans (3%). Short-term variable pay relatively unchanged, but paying less than target Sixty nine percent of organizations reported that their short-term incentive programs had paid out less than targeted levels in 2008, with 34% reporting payments of less than 70% of targeted levels. A substantial number (38%) of organizations are making design changes to bonus/incentive plans. Those organizations that are making changes tend to be doing so to align their bonus programs with a changed business strategy or model, although increasing employee motivation and decreasing cost were also significant factors. Only 12% felt that public opinion and 11% felt that corporate governance requirements were a significant factor in their decision to redesign short-term incentive programs. Long-term variable pay value drops significantly Many organizations have stated that the value of their long-term incentive programs have dropped substantially by an average of 37%. Approximately 28% of respondents indicated that they have already made changes or are considering changes to long-term incentives, with 47% considering or making changes to the mix between options, shares and units, and 41% considering or making changes to grant a lower value of options, shares and units per employee in As a result, the value of 2009 total direct compensation programs globally is likely to be less than 2008 because of both diminished organizational performance as well as decreased grants. Employees most concerned about job security The primary concern for employees (as stated by survey respondents) is around their job security, with 88% of organizations reporting this as a concern. Eighty seven percent of organizations state their employees are concerned about their salary levels and 85% about the cost of living and inflation.

7 7 Reward in a downturn Pension funds hit hard The fall in funding levels of many defined benefit retirement programs will have a huge impact. Our survey shows 19% of organizations with defined benefit funds reviewing those funds, and 15% with defined contribution plans doing the same. Defined benefit programs in particular are likely to need significant additional funding to meet their obligations. Of those looking to change their defined benefit programs, 35% are planning to move employees to a defined contribution plan, 30% will close membership to the plan and 21% will close the plan altogether. Talent management top of the list for employers The two primary concerns for employers during these challenging times are the ability to retain top talent and employees with critical skills (89% of employers stating concern), and the ability of organizations to maintain an engaged and motivated workforce (91% of employers stating concern).

8 8 Reward in a downturn Impact deepening around the world While the downturn was slower to impact on high-growth economies in Asia, Eastern Europe and South America, the survey confirms that the downturn has hit these economies hard in the past four months. In many cases, the drop in business performance and the need to cut costs is generally now being felt as strongly as in the developed economies. Fast-growth economies with high wage inflation such as India and China, which have seen double-digit wage growth for some years are now predicting salary increases of less than half of 2007 levels, with China s wage inflation now around the same rate as the global figure. South America (with the exception of Brazil) is yet to feel the full force of the downturn, but companies are taking the opportunity to get their house in order and review reward programs to protect against the risk of impact in the near future. Business results significantly worse Median salary increase all employees Decreasing staffing levels Global 39% 2.8% 27% North America 40% 2% 33% South & Central America 23% 10%* 18% Europe 45% 2% 30% Asia 39% 5% 13% Pacific 33% 3% 33% * increases for South / Central America are inflated by high levels of pay increases in Argentina and Venezuela; in other countries in the region, the increase is around 5-8%, closer to the global norm. The impact of the downturn in smaller and emerging economies is frequently exacerbated by local conditions, which are magnifying its effects and impacting particularly on business confidence. Factors such as the property crash in Ireland, political turmoil in Thailand and the ongoing currency crisis in Hungary are increasing the vulnerability of those economies in the downturn and requiring organizations to take even more pronounced actions to shore themselves up. In contrast, other countries such as Australia and Peru are experiencing a delayed (and sometimes moderated) impact of the global downturn, but without locally intensifying factors.

9 9 Reward in a downturn Counting the cost business and people impacts The talent management challenge In recent years talent markets have been overheated due to the lengthy economic boom, and more so in certain industry sectors and geographies. The economic slowdown will have its counterpart in the talent market: as organizations move to slow growth or retrench, so the demand for talent slows and unemployment grows. In high-growth geographies and industry sectors, the slowdown will have the potentially welcome side-effect of taking some heat out of the talent market, enabling organizations to perhaps more easily source the talent they need to sustain their business at more reasonable prices. Some talent shortages, such as in nursing, high technology and engineering, may also be eased by the baby boomers who are being forced to put off their retirement date until their pension funds recover. However, organizations cannot afford to be complacent and assume that their high performers will not have motive or opportunity to leave. The best employees will always be able to move on and find new opportunities. Talent will be a critical factor in getting organizations through the economic storm, and smart organizations will be looking to poach key individuals from the competition. Employee engagement across the entire workforce will be a concern, particularly when wage freezes or headcount reductions are necessary. When doing more with less, the discretionary effort of employees willing to go the extra mile is even more critical for surviving the downturn and being positioned to grow once the environment is more favorable. With compensation budgets continuing to be limited, organizations will need to focus more on total rewards, and particularly intangible rewards, to achieve this engagement. Hay Group research shows that rewards such as career development opportunities, a great climate, interesting work, the opportunity to work with talented colleagues and non-financial recognition are the keys to retaining employees and maintaining employee engagement. Restructuring and pay freezes As labor costs are generally one of the largest costs for an organization, it is often the first target of cost cutting. Organizations in crisis mode too often resort to quick, overly simplistic one-size-fits-all cuts in headcount or salary budgets. Uniform cuts across the board have a profoundly demoralizing effect on the workforce especially on high performers as these cuts fail to take into account the contribution of individuals and groups on past performance, or the increased need for some job roles in certain market conditions. It sends out a signal to employees and the market that the company is in trouble, and it may lead to the best talent jumping ship. Redundancies and compensation contractions should always be undertaken strategically and surgically, based on an understanding of which roles and functions will be critical now and when moving into recovery mode. If job cuts or pay freezes have a strong business rationale, employees and other stakeholders are less likely to respond negatively. This means organizations may need to do some work to establish which roles, functions and people are critical to their success and to be able to demonstrate to stakeholders why they are continuing to invest in those roles, functions and people, but not in others.

10 10 Reward in a downturn Variable pay and incentives The downturn will have a double impact on many employees. Incentive programs linked to organization financial and operational success are likely to pay much less than in previous years, or may pay nothing at all. The extended period of market growth means that many employees will have received some sort of bonus for many years, and may have come to see their bonus as a right rather than as a reward for success. Organizations are likely to come under pressure to provide incentives that will not pay out well under current conditions. By design, when performance is down, the incentive plan should not pay out as much as in good years. Well designed performance bonus plans should act as an automatic stabilizer for companies: leading to the paying out of less remuneration in poor years when profitability has been hit, and more in good years, and therefore acting as a cushion against job cuts. The success of incentives depends on them being seen as strongly related to performance. Many organizations are seizing this opportunity to further strengthen the relationship between pay and performance via the incentive program and to remove any remnants of an entitlement mentality. Pensions The cost of covering additional funding for pensions may mean less money for pay increases, bonuses, benefit programs and other forms of reward. In many cases organizations may need to reduce the cost of these programs through closing them to new entrants, shifting to defined contribution programs, raising the retirement ages of participants, or decreasing employer contribution rates. With defined contribution retirement plans, the funding burden falls more directly on the employee. The value of these programs has fallen by up to a half in many cases a major concern for older employees considering retirement. In addition, a number of organizations have begun eliminating or suspending the organization contribution and/or match for these plans given current economic conditions. The trend away from defined benefit to defined contribution plans will continue to be accelerated as the downturn continues. This can be a highly sensitive issue for employees and any changes to pension plans should be considered carefully. Understanding the demographics, needs and preferences of the workforce is critical to building a sustainable solution that is understood and accepted by employees. While older employees are likely to prefer a generous defined benefit fund, many younger employees will welcome a shift to defined contribution programs, which offer greater flexibility and mobility. Involving and communicating with employees throughout the change will be critical to its success. Resourcing and succession Organizations may also need to rethink their succession and labor resourcing plans. Delayed retirements mean organizations retain experienced and skilled workers. However, these employees are likely to be more expensive, may not be fully engaged and can act as blockers on the career aspirations of younger employees. It will be important for organizations to develop their engagement strategies with this new segment of the workforce fully considered.

11 11 Reward in a downturn Performance Good times can hide a lot of sins. In a boom market, organizations often gloss over poor performance and may be reluctant to enforce strong performance management systems. In crunch times, many organizations do the same thing in reverse, imposing restrictions on all employees regardless of performance. Mediocre performers are unlikely to see the need to change, and high performers see no return on their discretionary effort and leave. Employee engagement suffers at a time when the organization needs it most. Robust performance management processes are critical to success in a downturn. Organizations should clearly define and communicate what good performance looks like, recognize and reward good performance as well as bad and appropriately differentiate performance and related rewards. Organizations also need to broaden out their thinking on the pay and performance relationship and include the whole suite of rewards in this context not just base salary increases and incentives. That doesn t have to mean spending more on reward. Employees work for more than money: they work to get training and career development, to make a valuable contribution, and because they enjoy contributing to a common vision and making their place of work a better place to be. Organizations need to understand what it is that their employees value and focus on improving these, even if financial rewards are being squeezed. Lastly, this is an opportune time for organizations to do a better job putting their mouth where their money is in terms of communicating the value of the organization s total reward programs. Hay Group research has found that many employees do not understand the total value of reward programs that an employee receives, and that such an understanding has a clear positive relationship with organizational effectiveness. Total remuneration To date, employers have largely focused on saving money through adjusting salary levels or job restructuring. It takes longer and is often more complex to adjust non-cash remuneration such as benefits and pensions. But with non-cash items of remuneration accounting for 30% or more of total employee costs, these will increasingly come under scrutiny as the recession continues. Leading companies are likely to take the downturn as an opportunity to look strategically at the total cost and structure of remuneration, and to alter this to better meet the needs of the company, while still providing incentives and motivation for employees.

12 12 Reward in a downturn Summary findings US A total of 40% US organizations continue to expect business results to be significantly worse than targeted or budgeted levels. This is up from 16% from a year ago. As a result, organizations have significantly tightened the reigns on wage increases, with executives taking the biggest hit. In Hay Group s research, 37% of organizations have instituted a wage freeze for their employees. Over half of the 511 reporting US organizations report that their executives will receive no increase. Budgeted base salary increases for 2009 by employee group are given below: Table 1 What is your organization's base salary increase for 2009 as a % of base salary? (North America respondents) First quartile Median Third quartile All employees 0% 2.0% 3.0% Executive 0% 0.0% 3.0% Management/professional 0% 2.0% 3.0% Support/clerical 0% 2.0% 3.0% Blue collar/skilled trade 0% 2.0% 3.0% High performers 0% 2.0% 3.8% Organizations have been swift and decisive in their actions around reducing their labor costs during these trying economic times. In addition to wage freezes and modest salary increase budgets, organizations have also substantially tightened their belts on overall staffing levels. Of the US organizations surveyed, 34% report decreasing their overall staffing levels, up dramatically from 19% only four months ago. Significant changes to retirement programs are being made by US organizations as a result of the deteriorating economic conditions. A fifth of organizations with either defined benefit or defined contribution retirement programs are reporting that they are considering making changes to the value of these programs. Of organizations making changes to their defined contribution plans, the vast majority (78%) report they are considering decreasing the benefits levels to this plan. Organizations making changes to defined benefits programs indicate the most common likely changes are closing membership to the plan (34%), decreasing benefits levels (34%) and moving members to a defined contribution plan (32%). Sixty nine percent of US organizations reported that their short term variable pay programs (e.g. bonuses, incentives, profit sharing) paid out less than target. However, it appears the majority of organizations (44%) are not making design changes to their 2009 short-term incentive plans. 39% of companies are making or considering changes to the design of their short-term variable pay programs in The most common reason given for making design changes was better alignment of the variable pay program with changes in business strategy (60%). Only 15% felt that public opinion and 4% felt that corporate governance requirements were significant factors in their decisions to redesign bonus/incentive programs. Many organizations have stated that the value of their long-term incentive programs have dropped substantially by a median of 40% in the US and 30% globally. Approximately 32% of US respondents indicated that they have already made changes or are considering changes to their longterm incentive programs. Of those organizations, 56% are making or considering changes to the mix of long-term incentives between options, shares and units. In addition, approximately 47% of organizations report they will be granting lower values of options, shares and units per employee in As a result, the value of 2009 total direct compensation programs in the US will likely be less than 2008 because of both diminished organizational performance as well as decreased grant values.

13 13 Reward in a downturn Summary findings South and Central America Faced with global economic uncertainty, the opinions reflected by survey respondents in the Spanishspeaking countries of South and Central America are more optimistic than those registered in the survey at a global level. Seven out of ten companies stated that they expect to reach the financial performance budgeted for this year, compared to just 57% globally. From 2008, 62% of the respondents have increased salary budgets (compared to the global figure of 32%). However, it is important to highlight that the annual inflation of the countries of this region is between 5% and 20%, meaning that salary increases are required simply to maintain the purchasing power of employees. This indicates that the global downturn is affecting the region at a more gradual pace than in more developed economies, but is beginning to be felt. Governments and organizations in the region have had more warning and therefore more time to prepare for the impact. As a result, we are seeing measures being taken now to reduce potential future risks to performance rather than in response to a current decline in performance. The impact of the global downturn in this region is exacerbated in the case of Argentina and Venezuela by a local context of political crisis, nationalization of companies and union strikes, generating future uncertainty. Brazil In general, Brazil s results are more in line with the global norm than with the region, with the downturn impacting on Brazil s economy more quickly than elsewhere in South America. 40% of Brazilian companies anticipate they will meet their global targets, compared to 57% globally and 73% for the region. Higher base salary increases reflect a higher inflation rate, while a slightly higher incidence of salary freezes may reflect legislative restrictions on salary reductions, meaning companies are left with fewer alternatives to freezing pay than organizations in less regulated environments. Similarly, actions taken to reduce salary spend are more focused on managerial and professional levels than globally, reflecting the restrictions placed by union agreements on changing conditions of employment for blue collar and clerical workers. Brazil has a high prevalence of short-term incentives, resulting from tax advantages provided for variable pay. A high proportion of Brazilian organizations plan to review their short-term incentive plans in 2009: 67% against the global norm of 38%. This may reflect a greater concern with ensuring incentive plans are more closely linked to performance, as a greater proportion of Brazilian companies are also planning to review their performance management systems.

14 14 Reward in a downturn Argentina In Argentina, the global turmoil is affecting the country to a much lesser degree in the first quarter of this year compared to that of other countries worldwide, with 73% of companies reporting that their business performance will be close to target levels by the end of the year, and the same proportion planning to increase their salary budget with a median salary increase of around 12%. This figure is significantly higher than the global median salary increase of 2.8%, but Argentina continues to experience rising inflation rates, which is to a large extent forcing wage increases. More significant may be the responses on questions about cost-cutting measures, which are more in line with global norms. Fifty five percent plan to freeze or reduce staffing levels, while a significant number are undertaking or planning organizational restructuring, early retirement packages and promotion freezes. The majority are planning to introduce changes to training and development schemes, the use of contract laborers and overtime wages. Colombia Despite more than 70% forecasting that they will reach their business goals in 2009, Colombian organizations are being very conservative on salary increases, with predicted increases tracking inflation. The downturn is beginning to have an effect but not yet at the levels forecasted. It is expected that the crisis will hit the country in the second half of 2009, and companies are getting prepared to face the situation in a good shape. Financial institutions are in a strong situation which is very important to back up company s investment plans for the FY09. Chile After ten years or more of economic stability, the prospect of being impacted by the global economic crisis has had a strong impact on business confidence in Chile. However, unlike their counterparts in Europe or the US, organizations have had some time to prepare their response as the effects of the crisis are only now beginning to be felt. As a result, even though 80% of respondents forecasted they will hit their business goals, a large proportion (63%) are freezing salaries more than double the regional norm of 26%. Similarly, more businesses in Chile are freezing staffing levels (43%, compared to the global norm of 30%) although only 13% plan to decrease staffing levels. This may indicate that Chilean organizations are taking actions to minimize salary costs in order to avoid having to cut jobs. Venezuela Despite the crisis, most Venezuelan companies are not planning major changes in their compensation plans and are taking less severe actions to adjust HR practices or staffing levels in response to economic uncertainty than organizations in more developed economies. In line with the rest of the region, 78% of Venezuelan companies expect business results to be close to targeted levels. 87% of Venezuelan participating companies expect to increase salaries in 2009, higher than the regional average of 62% and well over twice the global norm of 32%. Following a similar pattern to other countries in the region, 23% of the companies plan to freeze staffing levels and 21% will decrease staffing levels. Peru Peruvian organizations are slightly more optimistic than the South American region as a whole, with 74% of the participating companies predicting they will hit their targets. With lower inflation than some of its neighbors, Peru s projected salary increases are lower than the regional norm, at a median of 5.4%. However, 32% plan to freeze salaries and 31% will freeze staffing levels, in line with the regional norm.

15 15 Reward in a downturn Summary findings Europe For all employees in Europe, companies are projecting lower pay increases in 2009 (2.0%) than the global norm (2.8%). In over 25% of European companies, there are no increases being projected at all. Europe is a large and complex region, and increases vary considerably across the region: projected increases are lowest for those economies hardest hit by the downturn, such as Ireland and Latvia, where a significant number of companies will be providing no pay increase. The highest projected increases are in Norway (3.4%) and Greece (3.3%). Table 1 What is your organization's base salary increase for 2009 as a % of base salary? (Europe respondents) First quartile Median Third quartile All employees 0.0% 2.0% 4.0% Executive 0.0% 0.0% 3.3% Management / professional 0.0% 2.0% 3.5% Support / Clerical 0.0% 2.0% 3.8% Blue collar / skilled trade 0.0% 2.0% 3.4% For over 50% of executives in Europe, companies are projecting no increases at all, as companies look to their senior management to lead by example in reducing salary costs. As well as lower (or no) salary increases, pay freezes and pay cuts are higher at executive levels than for other jobs. For 43% of executives, companies have made or are considering pay freezes, 10% have made or are considering temporary pay cuts; 10% companies have made or are considering compulsory salary cuts, and 14% have made or are considering voluntary/negotiated cuts. At the blue collar / skilled trade level, these percentages are significantly lower: 27%, 7%, 5%, and 9%. What s more, around half of companies who offer long-term incentives have seen the value of those incentives reduce by an average of around 40%. These plans typically form a large part of executive compensation, and taken together with the trend towards pay freezes and cuts, this result represents a significant drop in the value of executive pay. Thirty percent of organizations in Europe are looking to decrease their staffing levels. This is slightly higher than the proportion globally; however this proportion is much higher in some countries than others: in Greece, 50% of companies are decreasing staffing levels, 44% in Portugal and 40% in Ireland and France. In Italy, only 8% of companies are looking to decrease staffing levels. In 71% of European companies, 2008 bonuses paid out at less than target, with 36% paying out at below 70% of targeted amounts. For 2009, 48% of companies are already projecting that bonuses will be below target. Not surprisingly, 40% of companies are looking to redesign their bonus schemes in 2009 with the greatest changes expected to performance threshold levels, where the target levels will be increased (33% of companies). With companies that have defined benefit pension schemes, a quarter (24%) are considering changes to the scheme, with 37% of these planning to move members to a defined contribution scheme, 28% closing membership to the plan, and 26% decreasing benefit levels. 15% of companies with defined contribution schemes are considering changes to these the most common action planned being to reduce benefit levels.

16 16 Reward in a downturn Training and development is the HR program most hit by the downturn in Europe, with 50% of companies eliminating or decreasing programs, or considering doing so. Other significant HR impacts are that 48% of companies have or will decrease or eliminate the use of contract labor, and overtime wages have or will be reduced in 25% of companies. The HR program that will be most increased (in 10% of companies) is non-financial recognition. United Kingdom Employees in the UK are even less likely to see a salary increase in 2009 than elsewhere, with the UK median base salary increase for all employees sitting at 1% (compared to the global median of 2.8%), down from 3.5% just last November. More are also likely to lose their jobs, with 36% of companies decreasing staffing levels (compared to 27% globally) and up from 19% in the November survey. These results are a reflection of the current tough economic conditions in the UK, the uncertainty surrounding how long these conditions will last and how severe the situation will become before it improves. While our November survey showed that many organizations were taking a wait and see approach to cutting costs, the deteriorating economic situation has forced many to take immediate actions in response to the recession, e.g. by freezing salaries, making redundancies and restructuring. The present worries of employers also came out in the survey, with a large number expressing extreme concern over maintaining employee engagement/motivation, and also retaining and recruiting top talent/critical skills. With many organizations taking immediate and short-term actions, is enough caution and creativity being exercised in order to give organizations the best chance of retaining talent and reacting successfully in the upturn? The survey responses reflect the pressure employers are feeling around the need to cut costs quickly and show how they are focusing on more structural solutions to do this rather than more creative approaches to retain and motivate talent. Hay Group recently conducted research in the UK which suggested that organizations, although focusing on short-term solutions (restructure, redundancies etc) are thinking about the long-term and are focused, where possible, on ensuring that they have talented and engaged employees in place for the upturn. We think there is a gap here and that employers need to realize that the success of their longer-term approach will be determined by their ability to focus on the short-term engagement of their employees. This requires a greater focus on more consultative approaches involving employees, rather than structural solutions. Ireland Fifty-three percent of Irish companies continue to predict worse than expected results for It is more in line with the global outlook, where 39% of companies are predicting poorer than expected results for the year, although lagging the UK, where only 33% of organizations foresee worse than expected results for this year. As a small, open economy, Ireland has been particularly exposed to the downturn in the global financial markets. As a major export economy it is also closely linked, and subsequently affected, by the downturn in other European markets. This has been further exacerbated by the collapse of the local building sector. So while the global survey results show Ireland as being slightly more pessimistic in its outlook, the companies responding are slightly more positive than they were in November However, there is still some uncertainty around non-managerial level wages. This is due to the latest round of the National Wage Agreement which has been decided, but not implemented by many industries and may be suspended further

17 17 Reward in a downturn Pay freezes have been widely used (58%) to control pay costs, but salary cuts, mandatory reduction of hours, benefits and/or unpaid leave for cost saving is being widely avoided in the Irish market. However, 40% of respondents are considering staff reductions while unemployment continues to rise, with the annual average at the end of 2008 at 6.4%. Half of Irish organizations are looking at reviewing their performance management systems, but most are not looking at changing the thresholds and short-term incentive plans that they currently have in place. This is a little higher than the UK, where 60% of respondents reported that they were not considering changes to their performance management systems, but like Ireland, most companies are not intending to change their short-term incentive plans. Irish companies are now mainly concerned with motivating their staff (100%), training and development (80%) and retaining top talent (70%), where they were more concerned with maintaining and affording pay in late Employees concerns however remain the same, and that is primarily the security of their jobs and pay. Netherlands In the Netherlands 44% of respondents are expecting their business results to be worse than targeted level (compared to 27% in November 2008). This could be one of the reasons that base salary increase for 2009 has dropped to 2% from 3%. Consistent with the global findings, the base salary increase for executives is lower than for the employee population as a whole, but high performers will still receive higher increases than the average. Over a third of companies (36%) are decreasing staffing levels, more than the European norm of 30%. As a small, open economy, the Netherlands is very sensitive to global developments. Financial services, an important sector in the Netherlands, has been strongly impacted by the global credit crisis and government intervention could not be avoided. Forty eight percent of participants responded that their 2009 short-term incentives program will be below budget, but the majority (63%) are not making any changes to the design of their program. Incentive programs are expected to be flexible and in a downturn, this means reduced cost to the organization. The survey results show that incentive programs are working as designed: when business results are worse than targeted levels, the incentives pay-out is lower. In line with global results, companies believe employees are mostly concerned about job security (81%) not surprising given that many companies are considering organization restructuring to reduce staffing levels. Germany Compared to the overall results and in comparison to some other European countries, the forecast for business performance in Germany is more pessimistic. 50% of the survey participants in Germany predict that their overall business performance will be significantly worse than targeted levels; whereas only 39% stated this in the global results. This gloomy outlook is reflected in the results for Germany. The overall predicted median salary increase for 2009 in Germany is 1.5%, compared to the worldwide results of 2.8% and the European median of 2.0%. In a similar vein, a large proportion (47%) of participating companies indicated that they are going to freeze salaries at 2008 levels, which is significantly higher than the results on a global basis (36%). Even more striking is that 65% of respondents plan to freeze their existing staffing levels more than twice the global figure of 30%.

18 18 Reward in a downturn Most German companies are not considering changes to their performance programs and incentive schemes. This is potentially due to the ongoing public debate around executive pay, and the expected legal changes on incentive design. Many companies may prefer to wait until they have greater clarity on what will be required before making any changes. Unlike the global results, retention and talent management seem not to be the highest items on the HR agenda. This is potentially due to the fact that almost all sectors in the German economy have been impacted by the downturn, reducing the demand even for key talent. Hungary The survey results show a dramatic deterioration of the economic situation compared to the November 2008 survey. Salary increases and short-term incentive programs have been reduced by most companies, and the number of the companies opting to decrease staffing levels has doubled since November to 35%, with a further 34% freezing staffing levels. This may be due less to a dramatic deterioration of the real economic situation over the past few months, and more to the perception of the situation becoming much darker. In our opinion companies have realized in the past three months how much the crisis has affected them. These perceptions will also have been heightened by the ongoing currency crisis in Hungary, which has increased business pessimism. The results show that Hungarian companies are in general taking the approach that they must reduce costs at all costs.

19 19 Reward in a downturn Summary findings Asia Previously fast-growth economies in Asia are now beginning to feel the full force of the downturn. Many are now reporting wage freezes, downsizing and other cost-cutting measures at similar levels to the global findings. As international trade slows and sources of foreign income such as tourism dry up. Many Asian economies have seen a sharp drop in wage inflation, although in many parts of Asia (particularly Indonesia) pay is rising at rates well ahead of other parts of the world. Even where lower quartile predictions of pay inflation are at or near zero, as in China and Malaysia, there are still a large number of organizations who intend to set pay increase budgets of 5% or more. This however should be contrasted with levels in previous years of 12% or more. The responses on pay budgets for 2009 indicates a polarized situation, with organizations either freezing pay altogether or maintaining business as usual pay reviews. In India and China the organizations that are freezing pay are more likely to be local operations of multinational companies, who are more likely to be paying at the upper quartile of the market and therefore will be likely to remain competitive despite the freeze, at least in the short-term. If the freeze continues for another year, however, then foreign owned companies in India and China will see a significant weakening of their market positioning compared with state owned enterprises and indigenous companies. China There is an increasing level of pessimism among the respondents (largely multinationals) in China in the past nine months. Close to half of the respondents believe their companies business results will be significantly worse than target levels. Base salary increases forecasted over the past nine months has been decelerating in China: from 10.9% last August to 9% in October to 8% in December to a mere 3.8% now in line with global forecasts. This is all the more significant in a country where the government is still pushing for 8% GDP growth in 2009 and where base salary increase have been in the range of 7-12% in the past two decades. A majority of companies will either decrease salary budget or keep salaries at 2008 levels, which is even higher than the global level. In terms of controlling staffing levels, companies in China tend to adopt a wait and see approach rather than resorting to lay-offs to cut cost. Companies still view China as a growth market and want to be in a good position when the economy rebounds. This may also be attributable to barriers to layoffs which have been set by the government. However, in the past six months, we see a gradual yet increasing trend for companies to reduce staffing level due to the worsening economic conditions in the country. Short-term incentive practices in China are quite consistent with the global findings. Companies have largely kept their 2008 short-term incentive programs intact. Those who did change either reduced incentive pay-out or increased performance threshold. Overall, companies in China paid out somewhat higher short-term incentive as a percentage of target than the global norm, partly reflecting the fact that China was less severely impacted by the global recession in For 2009 short-term incentive programs, companies in China are somewhat more aggressive in containing cost or driving performance by either lowering target incentive amounts or increasing performance thresholds. Faced with growing concern about the global economic downturn, companies in China are also considering or implementing other options to save cost. Most notably companies are cutting training and development programs, reducing travel cost, overtime and contract workers.

20 20 Reward in a downturn One thing that stands out is a focus on retaining high performing employees. Most companies are either maintaining or increasing investment in related programs. Companies are using the downturn as an opportunity to further enhance their performance management programs, maintain employee engagement and motivation and focus more on retaining top talent. In the current economic situation, companies are much less concerned with staff turnover across the board. It is widely reported that new graduates in China find it increasingly difficult to find a job and their expectations on pay and the type of work they want to do have been significantly reduced. As a result, employees concerns are with job security, salary and the business prospects (revenue and customer) of their companies. India Overall, the picture for India has deteriorated, and is therefore closer to the global results. In September last year, many organizations in India were trying to convince themselves that the recession would not affect them too much. Now, with large numbers of organizations freezing pay, and predictions overall of median pay inflation of around 7.25% after years of double digit growth, there is evidence that organizations are having to tighten their belts. Nevertheless, the biggest concern for Indian companies is still the attraction and retention of talent as opposed to managing downsizing. This means that Indian organizations will continue to invest in competitive salaries for high performing and high potential employees, but will also need to get more creative in developing a work culture and leadership style that enables them to become employers of choice without having to resort to the checkbook. Another important point to note is that the public sector, which employs well over half of India's tax payers, is only now implementing pay reviews from as far back as 1 January 2006, which take no account of current market conditions. These include average increases for around four million central government employees of around 40% and, for 378,000 officers employed in commercial enterprises, average increases of 96%. Pay in the public sector remains relatively modest, even after these changes, but increases of this magnitude will clearly skew Indian pay market data for some time to come. South East Asia The impact of the downturn varies across the different economies in South East Asia, with Singapore the hardest hit. This is reflected in the survey results, with 80% of Singaporean respondents predicting they will fail to hit their business targets. Indonesia (22%), Malaysia (36%) and Thailand (43%) are more optimistic. Similarly, Singapore records a high rate of salary budget freezes, with 67% of respondents saying that they are freezing their budgets at 2008 levels. Responses from Indonesian companies tend to reflect a more positive outlook for the first half of the year than in the rest of the region, but the impact is expected to become stronger during the second half of the year. So, while business confidence is higher, companies are still tending to take conservative actions in anticipation of a more severe impact. Almost 40% of companies indicated that they will decrease their original forecasted salary increment, while 22% of companies indicated they will be freezing salaries. Other cost saving attempts include reducing overtime, hiring freezes and reducing contract laborers, and changing priorities from using permanent to contract employees. Closer to the global trends, Thai organizations are struggling to maintain performance in the face of the downturn. Salary forecasts are higher (5% median, against the global norm of 2.8%) but leading companies are looking beyond base pay to total cash, seeking ways to manage their fixed costs and developing more flexible approaches to rewarding employees. There is a strong trend in Thailand towards maintaining existing employee benefits, particularly in terms of saving programs, nonfinancial recognition and paid/unpaid leave policies.