RSS icon

Top Stories

Hold the Line on Salaries and Benefits

September 9, 2001
Related Topics: Downsizing, Compensation Design and Communication, Featured Article, Benefits
When it comes to salaries and benefits, there are several forces pushing at each other, and none wants to budge.

On the one hand, there is continued pressure to increase salaries, or at least keep them competitive. The labor shortage hasn't evaporated, and when the subject is retention, money still talks. And with many stock options underwater (worth less than the purchase price), traditional alternatives have become less-effective recruitment and retention tools.

On the other hand, budgets are being slashed, and compensation and benefits are tempting chunks to take a whack at.

The result of this tug-of-war is that HR sits in the middle. It is expected to maintain a delicate balance: recruiting and retaining the best employees while keeping payroll manageable. In an effort to keep top performers, organizations are proceeding with caution.

Companies look for alternatives to pay cuts
You know the bad news. Corporate earnings are bleak, a fact that quickly translates in many businesses to barely eking out enough cash to make payroll.

The good news is that in the past decade, wage growth hasn't been excessive. "Most companies haven't painted themselves into an inflationary salary issue," says David A. Hofrichter, a partner with the UnifiNetwork/Pricewaterhousecoopers.

A Conference Board survey released in June shows that the pay picture is unchanged from the last seven years. Actual 2001 salary-increase budgets are at 4 percent for non-exempt employees, 4 percent for exempt employees, and 4.3 percent for executives -- very similar to 1999 and 2000.

Rather than asking people to take pay cuts, most organizations are downsizing. Dan Ripberger, of Aon Consulting, says that companies are trimming fat while trying to keep employees happy.

"We're not seeing major changes to salaries of survivors," Ripberger says. "The people that are left are typically those who are of higher value to the organization. These people are fundamental line employees. Companies have always invested in them. Pay isn't out of whack."

If, after layoffs, the balance sheet is still red, some of the options for cutting compensation include:

Across-the-board reductions: Agilent, a high-tech spinoff from Hewlett-Packard, cut pay 10 percent for all employees, from the CEO down, in an initial attempt to delay layoffs. The pay cut went into effect on May 1 and was scheduled to last the rest of the company's fiscal quarter -- or longer.

"I think generally it's been quite accepted," says Amy Flores, an Agilent spokesperson. "This is part of the HP tradition, the HP way. People share in the good times and the bad times."

The cut could extend to the fourth quarter or longer. The reduction has saved $70 million in one quarter.

Forced unpaid vacations, sabbaticals, and days off: In June, Accenture, a large management-consulting firm, invited U.S. employees to take a voluntary sabbatical of 6 to 12 months. If employees choose the sabbatical, they keep 20 percent of their salary, full benefits, profit sharing, voice mail, the company laptop, e-mail, and equity awards that come along during that period. When the sabbatical is finished, employees can have their old jobs back.

The program has been very popular. The company expected 800 employees to take the sabbatical; 1,000 did so. Employees are using the time off for education, volunteer work, and vacation.

Other companies, like Sun Microsystems, have tried forcing employees to take days off and vacations without pay. Agilent, in addition to the pay cut, requested that employees take a few days of vacation or sick time so that the company doesn't have to pay it out when an employee leaves.

Sun planned a rest for all U.S. employees during the first week of July. Employees could use vacation days or take the time off without pay. Employees can also "borrow forward" if they don't have enough vacation time accrued. Some employees, such as those who were needed to close the financial books for the month, weren't forced to take the time off. "It went over very well," says Connie Russell, Sun's director of total pay and rewards. "This is a welcome break, really. We have a workforce that tends not to take vacations."

A hybrid plan: In late June, the manufacturer Hewlett-Packard, which is known for its low turnover and has survived four recessions in its 62 years, announced that it was giving employees four choices:

  • Take a 10 percent pay cut ending Oct. 31, 2001 (end of their fiscal year)

  • Take eight days of paid vacation

  • Take a pay cut of 5 percent along with four vacation days

  • None of the above

HP managers had no ability to keep tabs on what each employee elected to do; thus, employees were free to choose the fourth option. "We understand that some employees aren't available to contribute in this way," says spokeswoman Suzette Stephens.

She says that offering a choice positioned HP to look better than competitors like Sun. "People appreciate the choice as opposed to having things told to them."

During the first 24 hours after the announcement, the vast majority of employees chose one of the first three options. HP used its intranet to enable employees to make the selection.

By the end of July, however, the company still had to cut several thousand jobs.

Delaying increases: Steve Gross, of William M. Mercer consultants, notes that companies tend to give salary increases in one of two ways: either on varying dates, based on employees' anniversary dates or other factors, or on a common date for all employees.

If you give them a common date, Gross says, some companies are looking at the option of postponing that date, if necessary, for a few months. Sun Microsystems, for one, is planning to postpone its salary reviews (but not its performance reviews) from the second quarter of 2001 to some point in 2002.

If you give increases based on employee anniversaries, it can get more complicated. You might freeze salaries, for instance, on October 1, and some employees will have gotten increases already, while others won't. "The issue is perceived fairness," Gross says. "If everybody suffers equally, it's one thing. If people are treated unevenly, that creates a perception of unfairness."

Projected 2001
Salary Increases
Los Angeles4.7%
New York City4.3%
San Francisco5.6%
Washington, D.C.5.1%
SOURCE: Hewitt Associates LLC, 2000.

Gross recommends that you divide your workforce into three categories: star employees or future leaders, average employees, and below-average employees. He suggests that you pay the stars -- the top 10 to 15 percent -- better than the market rate, and give them a solid opportunity for advancement. The middle 80 percent should be paid competitive to the market. The bottom tier should not be the focus, and should be slowly allowed to leave.

"The best people make a significant difference," Gross says, "but it's the average people who get all the work done. You have to look at the bottom 5 percent each year. They're not bad people, but against everyone else in the culture, they're not stars."

Salary & Benefits Studies:

Aon Consulting/Radford Division
Benchmark Compensation Report
Hewitt Associates
U.S. Salary Increase Survey and other reports
William M. Mercer
U.S. Compensation Planning Survey


Workforce, September 2001, pp. 38-40 -- Subscribe Now!

Recent Articles by Todd Raphael

Comments powered by Disqus

Hr Jobs

View All Job Listings