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, Feb. 3 /CNW/ - 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.

    About Towers Perrin

    Towers Perrin is a global professional services firm that helps
organizations to improve performance through effective people, risk and
financial management. The firm provides innovative solutions in the areas of
human capital strategy, program design and management, and in the areas of
risk and capital management, insurance and reinsurance intermediary services,
and actuarial consulting. Towers Perrin has offices and alliance partners in
the United States, Canada, Europe, Asia, Latin America, South Africa,
Australia and New Zealand. More information is available at
www.towersperrin.com.




For further information:

For further information: Keri Alletson, (416) 960-4493,
keri.alletson@towersperrin.com

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