Are companies using their limited pay budgets effectively?

UK – July 3, 2009 – European companies are currently so focused on cutting costs through layoffs, salary and hiring freezes, that they may be setting themselves up for problems in the medium term, according to research from consultants Watson Wyatt.

The firm’s survey of 200 companies from across Europe and the Middle East found that 43 per cent (52 per cent of UK companies) have taken action to reduce permanent workers. Most have also sought to hold down pay, with over 70 per cent looking to reduce their budgeted pay increases in response to the current economic climate.

“These are clearly sensible measures in these uncertain times but our concern is around how companies appear to be using their limited pay budgets,” said Carole Hathaway, European head of strategic reward consulting at Watson Wyatt.

The Watson Wyatt survey found that less than a third of companies are targeting their reward budget on key employees. Moreover, where this is happening, the focus appears to target only high performers rather than those with business-critical skills.

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“Despite a majority of companies claiming to have a greater focus on their key talent, few are supporting this by actually targeting their reward spend on them,” said Carole Hathaway. “Top performers are not necessarily the same as those with business-critical skills. Few companies appear to have the reward and performance programmes that enable them to make this important distinction. But failure to reward adequately those with business critical skills – as well as high performers – can have implications on retaining these key workers when the economy recovers.”

The Watson Wyatt survey, which was conducted in mid-June, found that companies are taking a range of actions to engage their workforce:

• Increased communication on changes in the business – 75 per cent
• Increased communication on business results – 74 per cent
• Increased visibility of senior managers – 45 per cent
• Increased communication on pay/reward – 41 per cent
• Introduced/increased focus on mentoring programmes – 35 per cent

“While companies are stepping up their communication on the wider business situation, they should put more specific attention on communicating changes made to pay policies, even if that’s not going to be good news,” said Carole Hathaway.