This winter's blizzard of pink slips took unemployment to a staggering 8.1% in February. Unlike in previous recessions, though, many employers have not continued slashing staff to cut costs, says Scott Olsen, a consultant in the human resource services division of PriceWaterhouseCoopers.

Instead, they sliced rewards - freezing salaries, resetting merit increases, deferring bonuses and commissions, reducing or eliminating retirement plan matches, and increasing employee contributions to health care premiums and scaling back other benefits.

"Clearly, organizations are under tremendous pressure to find ways to reduce costs," says Ken Abosch, head of Hewitt's North American compensation consulting practice. "We've gone through the first-wave responses, which were layoffs and salary/bonus actions. In the next wave, which should come in late spring or early summer, employers will look at less obvious things like promotions, promotion pay, shift differentials, premium pay, overtime and hours employees work."

Olsen concurs: "Employers are taking a broader view on how to achieve cost-savings. People are being much more aggressive in looking for areas to reduce costs. They want to turn over every rock."

Laura Sejen, global head of strategic rewards for Watson Wyatt, says that a survey of 245 companies in mid-February showed that, on average, employers are taking five different HR-related cost-cutting actions. The good news, she notes, is that the worst appears to be over, at least for 2009. More than half of companies (52%) surveyed had already made layoffs, and only 13% were still planning to let people go.

"The lion's share of actions already have occurred," she says. While companies may make some additional changes going forward, they will be much smaller. "They're finished with the layoffs, salary freezes and hiring freezes. Now they're thinking about restructuring companywide or in HR for the longer term."

Salaries

Economic conditions have put a chill on salaries, and it may be some time before workers see a thaw.

Between October 2008 and February 2009, Watson Wyatt reports, nearly six in 10 employers had frozen salaries, and as of February, at least another 14% expected to do so. Of those who had frozen salaries, 78% did so across the board. Salary reductions were spread more evenly: 44% were across the board, and 44% were for certain employee populations.

Research by PriceWaterhouseCoopers and Hewitt shows the number of companies freezing salaries is much lower. "We're thinking that only 25% to 30% of organizations are going to freeze salaries at the executive level, and the percentage will be much smaller for the general population," says Olsen. Abosch puts the number freezing pay at around 10% to 15%.

Despite media stories about pay cuts, Hewitt has found salary reductions have been almost nonexistent, according to Abosch. Only 1% or less of the companies surveyed late last year intended to reduce salaries in 2009, and recent conversations with clients indicate these findings still hold. "The vast majority - 50% to 75% - are opting just to slow salary growth by reducing the amount of funding for salary increases," Abosch says.

Merit increases

Reducing raise amounts may be the softest punch, but it still packs a wallop. Abosch notes that a year ago, companies in Hewitt's survey group were planning to spend, on average, 3.8% of payroll on salary increases. In December, that had dropped to 3%.

"And, if you focus on the large segment of companies making changes, that 50% to 75%, the number is further reduced to 2.5%," he says. "That's a really significant drop, not only in size, but because anything under 3% pushes us below a psychological barrier for companies. It's never been that low in the 35 years we've tracked this. Even in 2001-2002, which looked to be an all-time low, it was 3%. To see 2.5% is pretty startling."

Sejen predicts that merit increases will continue to decline through 2010, and she would not be surprised to see them drop below 2%.

"That's pretty dramatic when you consider the impact on an employee," she says. "At 3% or 3.5%, you can keep ahead of inflation. If we get down to 1.5%, it will be hard for them to keep ahead of inflation. The combination of lower merit-increase budgets and salary freezes, combined with reduced workweeks and furloughs, plus increased employee contributions to health care benefits, could result in a real decline in earnings."

Companies not only are decreasing merit increases, but also lengthening the time cycle on them from 12 months to 15 months, adds Olsen.

Incentive plans

That same approach is being taken with bonuses, commissions and other forms of variable pay. Companies are either not funding bonuses at the same level, or they're becoming more stringent on the standards employees must meet to be eligible, Abosch says.

"I'd be surprised if commissions were being reduced because it's important to drive top-line growth," he says. "What we are seeing is the tendency to draw these payments out and to make sure that the results are there before payment is made. That's a general trend - employers want to see substantiation of results."

Despite significant decreases in merit-based pay, Hewitt's research also indicates that most companies offering variable-pay programs are not making drastic cuts to their 2009 budgets. For salaried exempt employees, spending on variable pay as a percentage of payroll is expected to be 11.1% in 2009, slightly lower than the projected increase of 12.1% in July 2008.

Variable pay spending for salaried nonexempt employees is expected to decrease from 6.1% to 5.7%. According to Hewitt, more than two-thirds (69%) of companies offer variable pay programs to employees, and another quarter (24%) plan to introduce one in 2009.

Benefits and recognition

There is no evidence that employers are offsetting salary budget decreases with additions to benefit programs, the experts indicate.

Doug Thomas, managing director of SMART Business Advisory and Consulting, says employers are not offering noncash substitutions to employees or increasing benefits, with the exception of wellness incentives.

"Even things like training budgets are under significant pressure right now," remarks Olsen.

"Benefits aren't as flexible as comp," Abosch notes. "It's harder to modify benefit programs in midstream, so we don't tend to see as much recessionary impact here."

The one exception, he says, is 401(k) funding. "Companies are reducing the level of exposure they've experienced in the past." Hewitt reports that 17% of employers have reduced their employer match to their 401(k)/403(b) match.

Olsen believes matches will come back. "I don't think this is a long-term trend. In terms of total rewards, this is very important to people, and employers have to be competitive here."

Some organizations are trying to temper the bad times by ramping up special recognition awards for employees. Sejen says 15% of employers have done so, and 18% say they'll try to do more this year.

Abosch is also noticing increased interest in recognition and rewards, but only "nominal perks," such as preferred parking spots, gift certificates, team pizza parties and lunch with the boss. "These types of rewards are more spontaneous and tend to be given when warranted. They're always popular and powerful."

"Employers are trying to make their organizations a fun place to work," observes Linda Ulrich, a principal with Buck Consultants. "They're trying to do things to keep people motivated. They're focusing on the positive, such as career development and projects such as Greening of America."

Pay for performance

As employers continue to trim their comp sails, experts will be watching whether they tighten the ties to performance.

"The question is whether companies will spread merit increases around like peanut butter and try to keep most employees whole, or whether they will take a tougher stand," says Sejen.

Employers say they're putting increased emphasis on pay for performance. In a survey by Buck Consultants last fall, only 2.3% reported they did not have a pay-for-performance philosophy, and nine out of 10 said they have a merit salary increase policy that considers individual performance to determine the size of the increase.

However, Abosch maintains he's still seeing the "peanut butter" approach.

"We haven't seen a single company approach salary cuts or freezes in a pay-for-performance way," he says. "My view is that companies have abandoned the pay-for-performance perspective in the midst of this crisis, which is unfortunate, because they have an opportunity to wrap their arms around their best talent and send a strong message."

Thomas agrees. "You're not going to find companies that will admit to not tying pay for performance, but those that do it well are still in the minority. I think it comes down to the fact that many managers still find it difficult to deliver bad performance news to an employee."

Olsen contends that pay-for-performance plans should be more flexible. "Employers need to decouple pay for performance from formulaic plans below the senior executive level. You need to be able to make exceptions in a down year so that people get some reward out of the plan."

Engine overhaul

While unwelcome, the recession does provide employers with the opportunity to reassess and recalibrate their rewards programs. The key is to be strategic, not reactive.

"This is the time to go back to fundamentals and examine whether your compensation philosophy is still aligned with your business direction," says Thomas. "That will give you a framework and direction for adjustments."

Compensation is a three-legged stool, he maintains. The first leg is risk assessment. "Do you need to implement risk assessment processes or procedures, or merely get serious about what's already on the books?" The second leg is the incentive plan design. "What implications does the current environment have for your incentive plan? Do ethics and risk management play a larger part?" Third is performance management. "Does your system convey proper focus on ethics, accountability and full disclosure?"

"Unfortunately, a lot of companies have approached [their comp changes] in a knee-jerk fashion," says Abosch. "They're just looking for where they can find the most cost-savings in the shortest time. They haven't considered the long-term impact on their workforce or communicated the changes well. These employers are likely to see high turnover levels when things do recover, and they may even face legal challenges and labor organizing efforts as a result."