Have Cutbacks Peaked?

Study: Companies’ cost-cutting plans slow in anticipation of economic recovery 

U.S. employers’ efforts to battle the recession through cost-cutting actions such as layoffs and salary freezes might have peaked, according to an April 2009 update to an ongoing series of surveys by consultancy Watson Wyatt. A key finding: While some companies are still adopting measures such as salary and workweek reductions, cost-cutting plans for the next 12 months have been scaled back across the board in anticipation of an eventual recovery. Only one in four employers plan to increase their cost-cutting initiatives over the next 12 months, a sharp decline from the 51 percent that were planning more cost-cutting measures in February 2009.

According to the report, Effect of the Economic Crisis on HR Programs-- Update: April 2009, many U.S. employers have adopted a wait-and-see attitude, allowing them to make decisions over the coming months as they get a better sense of how long their companies will continue to be affected by the downturn.

The survey, with responses from 141 broad-based U.S. companies, was conducted in April 2009. At that time, most surveyed companies said they were planning:

• No further salary reductions (89 percent).

• No further salary freezes (76 percent).

• No further hiring freezes (67 percent).

• No further organizational restructuring changes (65 percent).

• No further layoffs (53 percent).

Although the majority of respondents were not planning any further salary reductions or salary freezes in the next 12 months, the number that had already made these changes had risen sharply from February to April 2009.   

Majority of companies not planning cost-cutting actions for the next 12 months (following April 2009):  

Action	Planning change in next 12 months  (%)		Not planning change (%)
	Have already made change and expect to do so again	Have not made change yet but expect to in next 12 months	Have already made change and do not expect to make further changes	No changes made or expected
Layoffs/reductions in force	41%	5%	31%	22%
Organization-wide restructuring	24%	10%	25%	40%
Salary freeze	17%	7%	43%	33%
Reduced workweek	16%	4%	6%	75%
Salary reductions	7%	4%	14%	75%
Reduce employer 401(k)/403(b) match	4%	8%	18%	70%

“Companies have started to move into the next stage of their cost-cutting actions but are also looking ahead to an eventual recovery,” says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. “There is a recognition that employers will need to be poised for a turnaround, and that continuing some cost-cutting measures such as reductions in force can put them at a disadvantage once the economy improves.”

Pay and Bonuses Down – for Now

Pay increases are bonuses were down across the board for 2009, with lower merit increases and short-term incentive (STI) funding. Yet, companies feel more optimistic about the future, the survey shows, projecting merit increase budgets to be closer to previous years' levels:

• Companies planned to fund their STI plans at 69 percent in April 2009, down from 71 percent in February 2009.

• Only 17 percent of organizations took cost-cutting measures to protect bonus pool funding.

• Planned merit pay increases are expected to remain at 2 percent in 2009 but will increase to 3 percent in 2010.

401(k) Matches Cut

The number of companies that reduced their 401(k) match jumped by 10 percentage points, from 12 percent in February 2009 to 22 percent in April 2009. There has been a slight jump in the number of hardship withdrawals taken from 401(k) plans – 44 percent of respondents in April 2009 noticed an increase in withdrawals, compared with 35 percent in February 2009.

“Even though companies are beginning to anticipate the end of the current downturn, they are still under great pressure to cut costs,” says Laurie Bienstock, U.S. strategic rewards leader at Watson Wyatt. “For employers forced to make difficult decisions such as reducing salaries, it would be beneficial to follow up with consistent communication to reassure employees through this last push.”

Other Key Findings

Among additional survey highlights:

• Companies continue to add or increase restrictions to travel policies and eliminate/ reduce training. Those implementing these measures have increased from 69 percent to 77 percent of respondents (travel policy) and from 35 percent to 42 percent of respondents (training).

• For companies that have already frozen salaries or plan to freeze salaries in the next 12 months, 58 percent will institute these changes across the board for employees, while 36 percent will institute it for only certain employee populations.

• 31 percent who have already reduced salaries plan to reinstate them by the end of 2009. For those that have already reduced salaries, 37 percent plan to reinstate and build off them at the next merit increase.