Posted February 3, 2009
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2009 Economy

Corporate Canada under pressure, reevaluating compensation plans; Potential workforce demographic bottleneck ahead

Salary Budgets are Being Trimmed or Slashed, Bonuses are Down for Most, Equity-Based Incentives are Underwater, Management Challenged To Meet Diverse Shareholder Expectations - What To Do?

TORONTO - Economic pressures are forcing Canadian organizations to make multiple adjustments to compensation programs, according to survey findings released today by global professional services firm Towers Perrin. But while modifications mean lower - or no - 2009 salary increases and lower bonuses, to date Canadian companies are more likely to consider highly targeted, strategic reductions and cuts to other discretionary spending rather than the mass workforce reductions that occurred in previous economic downturns.

The pulse survey of 246 Canadian organizations of all sizes from a range of industries conducted in January 2009 provides insights into how Canadian organizations are addressing workforce and compensation issues in light of ongoing economic uncertainty.

"Our research suggests that organizations are being more strategic in their response to economic adversity by taking steps to retain their best talent at the same time as they cut costs," said Fiona Macdonald, Managing Principal, Towers Perrin. "Compensation planning is particularly challenging during economic uncertainty - it is a fine balance between cutting costs in the short-term while safeguarding the organization's talent, who drive the organization's ability to rebound and build long-term financial health."

Resisting Draconian Measures

To date, only seven percent of respondents have made significant reductions in head count, although another 18% are planning or considering staffing cutbacks of this magnitude. Far more common approaches are hiring freezes (taken or contemplated by 74% of respondents) and targeted staff cuts focusing on less critical roles and poor performers (57%). Also common are reductions in discretionary spending on travel and entertainment (taken or contemplated by 79% of the respondents), employee events (70%) and training (49%). At the same time, more than half (61%) of companies are concerned about retaining high-performers and people in pivotal roles, and are considering actions such as retention awards, salary increases and higher bonus payouts for this group.

"There is no 'one size fits all' solution", adds Fiona Macdonald. "Many variables weigh in to finding the right approach to optimize workforce costs and productivity, from balancing immediate cost reduction requirements in the context of company-specific compensation philosophies, to retaining the right people and talent to meet long-term financial and growth objectives, and meet shareholder needs."

Other Highlights from the Survey Findings Include;

Salary Projections

Forty-one percent of Canadian companies have imposed or are contemplating salary freezes. Those not freezing 2009 salary budgets are now budgeting 3.1%, down from 3.9% originally planned. In total, including companies with a salary freeze, budgets are now 2.3%. Salaries for senior executives are more likely to be frozen than any other group.

Bonuses

Almost all companies are letting their bonus plans and formulas play and pay out for 2008 performance. At the professional and executive levels, the financial results are driving lower bonuses for 54% of participants, with some paying none. About 14% of participants are increasing bonuses. Companies are not reducing bonus eligibility, nor are they reducing long-term incentive eligibility.

Focus on Retaining Talent

More than half (61%) are concerned about turnover of high-performing employees and those in business-critical workforce segments. To address this concern, many are taking steps to recognize and retain top performers: 38% are considering targeted salary increases, 22% are considering higher bonus payouts, 22% are considering cash retention awards and 24% are considering retention rewards in stock. In addition, 29% of companies are contemplating changes to their long-term incentives, many with the goal of improving their retention effectiveness.

Struggling With 2009 Incentive Grants

Compensation committees are struggling to set incentive plan targets in light of 2009 budgeted/planned results that are significantly below 2008 levels, coupled with considerable market uncertainty. Sixty one percent say the financial crisis has affected their approach to setting 2009 performance targets under annual incentive plans, while a smaller percentage (31%) say the crisis has affected how they set goals for long-term incentive plans (LTIPs). The most common approaches being taken include: greater use of discretion in goal setting, lower threshold performance levels, and greater use of relative performance measures.

"Depressed share prices are posing serious complications for many companies in determining 2009 long-term incentive plan grants" said Fiona Macdonald. "A minority are granting a fixed number of options or shares, and those will have a lower theoretical value, given the dramatic decline in share prices. For the majority of companies that use the 'expected value' approach, lower share prices will require significant increases in the number of options or units in order to deliver an equivalent theoretical value. In some cases companies do not have available dilution, most are reluctant to ask shareholders for more, and Compensation Committees do not want to appear indifferent to the shareholder experience in order to stay true to the commonly accepted methodology. As a result, for perhaps the first time ever, the theoretical value of long-term incentives will most likely decline in 2009 compared to 2008. Forty-one percent of participants say they will provide lower LTIP values, with an average reduction of 36%. In total, our statistics anticipate that LTIP values will reduce by 13%. Since decisions are still in flux, we estimate average grant values will be lower by 10 - 20%, possibly by as much as 25%."

Pay for Performance Is Alive

Companies are holding the line on existing LTIPs, much of which involve underwater stock options and medium-term incentive plans with goals that now appear impossible. Sixty-five percent do not plan to address underwater stock options, and 90% do not plan to reset performance goals for existing awards. There is, however, a widespread shift to redesign future LTIP grants: 44% plan to change the mix of their plans; 35% plan to change the performance measures; 27% plan to change the threshold, target and maximum payout levels, and 25% plan to change the vehicles.

The Real Pot-Hole Ahead

Many professionals and executives may have been planning an early retirement, financed by a long career, their equity holdings in their employer's stock and through their retirement programs and savings. The drop in the stock market has decimated many people's individual personal financial savings, including the pension values for those with Defined Contribution pension arrangements, and the significant value of in-the-money stock options has largely been wiped out.

"'Freedom 90' has replaced 'Freedom 55'. But the real issues for employers are: how to get these seasoned professionals re-focused on the enormous challenge ahead; what to do with the succession plans that are now stalled; and how to get those no longer up for the challenge out when the financial consequences will be significantly different than their recent expectations. Decisions made now on workforce planning and compensation will have a very real and dramatic impact down the road," concludes Fiona Macdonald.

© Copyright 2009/Exchange Morning Post/Exchange Business Communications Inc.
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