Effect of the Economic Crisis on HR Programs Update: October 2009

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Effect of the Economic

Crisis on HR Programs

Update: October 2009

About the Survey

In October 2009, Watson Wyatt continued our ongoing research on the economic crisis based on survey responses from HR executives at 201 U.S.-based

companies. This is an update to our bimonthly reports that began in October 2008 to understand what adjustments they are making to their HR programs (e.g., staffing, pay, benefits) in response to the economic downturn.

Executive Summary

A little more than one year after the financial crisis began,

employers are beginning to lift freezes on hiring and salary

increases. The percentage of companies reversing freezes has

increased markedly from our June and August surveys.

Almost all companies have made offers to new hires in the past

three months, and the vast majority anticipates making offers in the

next three months. However, approximately one-fifth still anticipate

making layoffs in the remainder of 2009 or in 2010. This number is

significantly less than six months ago, but reinforces that

companies are at different stages in a recovery that promises to be

uneven. But as the labor market slowly begins to thaw, almost

two-thirds of employers report that they are more concerned about the

retention of critical-skill and top-performing employees than they

were before the economic crisis hit.

At a Glance

About half of companies

plan to reverse salary and hiring freezes in the next six months.

While most companies

are making new hires, one in five is still contemplating further layoffs.

Retention of key talent

will be a major concern for employers in the recovery and beyond.

Key Findings

„ Fifty-four percent of the companies that have made salary freezes are

planning to restore them in the next six months, compared with 33 percent two months ago.

„ Almost half of respondents (49 percent) plan to reverse hiring freezes in the next six months, compared with 38 percent in August 2009.

„ An increasing number of employers are planning to reverse reductions to 401(k) match contributions in the next six months; this number has increased to 35 percent, from 24 percent two months ago and 5 percent in June. „ Almost all companies (96 percent) have made offers to new hires in the past

three months, and the vast majority (93 percent) anticipates making offers in the next three months.

„ Approximately one-fifth of companies still anticipate making layoffs in the remainder of 2009 or in 2010.

„ Almost two-thirds (65 percent) report that they are more concerned about the retention of critical-skill and top-performing employees than they were before the economic crisis hit.

„ In light of the recession, 44 percent of employers have encouraged managers to make increased use of recognition plans. Of those that did, 64 percent expect the increased use to remain permanent.

„ Only 37 percent of employers plan to organize a holiday party in 2009, compared with 47 percent that organized one in 2008 and 70 percent in 2007. Two in five (41 percent) of those that are planning a holiday party have decreased their budgets relative to prior years.

The percentage of companies that think their results have

already bottomed out has jumped considerably – 27 percent in

August to 37 percent in October.

Figure 1 | With regard to the recession, when do you think your company's results will "bottom out" and begin to improve?

At least half of companies expect to reverse hiring and salary

freezes in the next six months.

Figure 2 | If you have made changes to your hiring and pay practices, when do you expect to reverse/reinstate the changes?

24% 10% 10% 25% 27% 15% 8% 25% 37% 15% 9% 31% 25% 21% 18% 0% 10% 20% 30% 40% Have already hit bottom Currently at bottom Next 3 months Next 4-6 months 2010 or later August 2009 June 2009 October 2009 1% 2% 2%7%5% 49% 16% 23% 9% 20% 57% 13% 3% _0% 54% 7% 26% 6% 0% 10% 20% 30% 40% 50% 60% Next 6 months Next 12 months Next 18 m onths More than 18 months Do not expect to reinstate Do not know Of those reversinghiring freezes,70% will retain them for selected groups (business units, locations, job families, etc.).

56% Salary freeze 15% Salary reduction 56% Hiring freeze Percentage that made change 56% Salary freeze 15% Salary reduction 56% Hiring freeze Percentage that made change The percentage of

respondents planning to roll back salary freezesin the next 6 months has increased by 21 percentage points since August (33%).

Consistent with previous surveys, two out of three employers

expect any increases made to the percentage of health care

premiums that employees pay to be permanent. Half of

respondents expect to reverse cuts to 401(k) matches in the

next 12 months.

Figure 3 | If you have made changes to your benefits programs, when do you expect to reverse/reinstate the changes?

0% 1% 67% 15% 2% 8% 17% 13% 1% 25% 15% 35% 0% 10% 20% 30% 40% 50% 60% 70% 80% Next 6 m onths Next 12 months Next 18 months More than 18 m onths Do not expect to reinstate Do not know Of those reversing reductions to401(k)

matches,70% will restore the match to its previous level, 17% will vary based on profits, and 13% will be reinstated to a new, lower level.

25%

Reduce employer 401(k)/403(b) match

42%

Raise percentage employees pay for health care premiums Percentage that

made change 25% Reduce employer 401(k)/403(b) match

42%

Raise percentage employees pay for health care premiums Percentage that

More than 80 percent of employers that instituted a reduced

workweek expect to reinstate full weeks in the next 12 months.

Three-quarters of employers have instituted travel restrictions

since the recession began, but less than two in five expect to

reverse them in the next 12 months.

Figure 5 | If you have made changes to other programs, when do you expect to reverse/reinstate the changes?

0% 4% 20% 0% 0% 8% 44% 24% 10% 10% 23% 58% 0% 10% 20% 30% 40% 50% 60% 70% Next 6 months Next 12 months Next 18 months More than 18 months Do not expect to reinstate Do not know 17% Reduced workweek 15% Mandatory shutdown Percentage that made change 17% Reduced workweek 15% Mandatory shutdown Percentage that made change 14% 4% 5% 26% 28% 28% 20% 17% 19% 8% 3% 28% 0% 10% 20% 30% 40% Next 6 months Next 12 months Next 18 months More than 18 months Do not expect to reinstate Do not know 75% Add/increase restrictions to company travel policy

41% Eliminate or reduce training programs Percentage that made change 75% Add/increase restrictions to company travel policy

41%

Eliminate or reduce training programs Percentage that

Almost all companies have made or will make offers to new

hires. They are hiring across all job types, with professional,

non-managerial hires the most common and executive-level

positions the least common.

Figure 6 | Have you made any new hires in the last 3 months? Do you anticipate making offers to new hires in the next 3 months?

What type(s) of positions did you/will you hire?

One in five companies expects to make layoffs in the

remainder of 2009 and in 2010. This has decreased

significantly since April 2009 when almost 50 percent

expected to make layoffs.

Figure 7 | Does your organization anticipate layoffs?

22%

Yes – In remainder of 2009

20%

Yes – In 2010

96%

Yes–In last 3 months

93%

Yes–In next 3 months

13% 65% 83% 63% 71% 47% 0% 20% 40% 60% 80% 100% Administrative/clerical/manual Other

First-line supervisor/team leader Director/manager/middle management

Professional, non-managerial Senior manager/executive

Administrative/clerical/manual Other

First-line supervisor/team leader Director/manager/middle management

Professional, non-managerial Senior manager/executive

The most commonly hired positions were professional, non-managerial – those with specific domain expertise.

Companies are concerned about retaining their top talent;

almost two-thirds of respondents are more concerned now

than they were before the economic crisis.

Figure 8 | Compared to your level of concern about retention before the economic crisis hit, to what extent are you concerned about losing critical-skill or top-performing employees when the economy begins a recovery?

Almost half of respondents have encouraged an increase in

the use of recognition plans, and most expect to continue the

elevated levels after other program cuts have been restored.

recession, has your company encouraged managers to make increased use of recognition plans? Yes, formally 12% Yes, informally 32% No 56% 1% To a great extent 7% To a significant extent 43% To a small extent 3% Not at all 45% To a moderate extent

To what extent have managers increased the use of recognition plans compared to

before program cuts began?

1% To a great extent 7% To a significant extent 43% To a small extent 3% Not at all 45% To a moderate extent

To what extent have managers increased the use of recognition plans compared to

before program cuts began?

1% No 64% Yes 35% Don’t know

Do you expect managers to continue the increased use of recognition after other

reward programs have been restored?

1% No 64% Yes 35% Don’t know

Do you expect managers to continue the increased use of recognition after other

reward programs have been restored?

40% 8% 0% 26% 6% 2% 17% 35%39% 28% 0% 10% 20% 30% 40% Significantly m ore concerned Slightly more concerned Sam e level of concern Slightly less concerned Significantly less concerned Concern about retention has

continued to increase since August 2009.

Difficulty attracting and retaining key talent is a long-term

concern for employers.

Figure 10 | Looking ahead three to five years at your company, do you

expect any of the following to permanently change compared with pre-economic crisis levels (September 2008)?

Some employees continue to use their retirement savings to

get through the recession. In the last two months, more than

four in ten employers have seen more hardship withdrawals

and an increased rate of lending to plan participants.

Figure 11 | In the last two months, what changes have you noticed in participant activity in 401(k) or 403(b) plans?

17% 73%

11%

Employer contributions for pension plan

8% 41%

51%

Development programs for employees

3% 41%

55%

Difficulty retaining critical-skill employees

4% 47%

50%

Difficulty attracting critical-skill employees

11% 82%

7%

Employer contributions for defined contribution plan

4% 25%

72%

Percentage of health care costs paid by employee

1% 17%

83%

Employees working past their desired retirement age

43% 27% Decrease 29% 38% No change 28% Staff sizes 35%

Salary increase levels

Increase

17% 73%

11%

Employer contributions for pension plan

8% 41%

51%

Development programs for employees

3% 41%

55%

Difficulty retaining critical-skill employees

4% 47%

50%

Difficulty attracting critical-skill employees

11% 82%

7%

Employer contributions for defined contribution plan

4% 25%

72%

Percentage of health care costs paid by employee

1% 17%

83%

Employees working past their desired retirement age

43% 27% Decrease 29% 38% No change 28% Staff sizes 35%

Salary increase levels

Increase

3% 55%

42%

Rate of hardship withdrawals

2% 58%

40%

Rate of lending to participants

32% 65%

3%

Percentage of pay contributed by participants

35% 56%

9%

Percentage of assets invested in equities

Decreased Stayed the same

Increased

3% 55%

42%

Rate of hardship withdrawals

2% 58%

40%

Rate of lending to participants

32% 65%

3%

Percentage of pay contributed by participants

35% 56%

9%

Percentage of assets invested in equities

Decreased Stayed the same

Half as many companies are planning a holiday party in 2009

as held one in 2007. And those that do host parties will have

reduced budgets.

Figure 12 | Did your organization host a holiday party?

How does your 2009 holiday party budget compare to past years?

70%

47%

37%

Projected merit increase budgets have remained relatively

steady since June.

Figure 13 | Indicate your organization’s merit increase budget for 2009 and

projection for 2010 (as a percentage of your total payroll):

Expected annual bonus funding for the current year is at levels

similar to the most recent year funded.

Figure 14 | If your organization offers a short-term incentive plan, how was it

funded in the most recently completed year, and what is the projected funding for the current year?

3.0% 1.5% 3.0% 2.0% 2.8% 2.0% 2009 2010 projected

June 2009 (median) August 2009 (median)

In October, 40% reported a 0% increase for 2009, and 10% reported a 0% increase for 2010. October 2009 (median) 79% 79%

Median STI funding

68%

71%

Mean STI funding

Expect to fund this year Funded

last year

79%

79%

Median STI funding

68%

71%

Mean STI funding

Expect to fund this year Funded

Conclusion

The general economic picture is brighter than it was just a few months ago. Companies are beginning to reverse some program cuts and lift salary and hiring freezes. But even as hiring begins to pick up, it will be done selectively, and companies may still need to make cuts. This dichotomy of hiring while still making some layoffs will likely continue into 2010 as employers adjust their workforces for the new business environment amidst a potentially choppy recovery.

Employers remain concerned about their ability, both currently and in the long run, to attract and retain critical-skill employees. The increased use of recognition programs is one way to help keep key talent engaged and motivated. Having the right people in place and productive will be a key differentiator for companies looking to outperform competitors in a recovery.

Watson Wyatt Worldwide

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Our client relationships, many spanning decades, define who we are. They are shaped by a deep understanding of our clients’ needs, a collaborative working style and a firm-wide commitment to service excellence.

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For more information on research related to the economic crisis, call Watson

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