"No, Virginia. There'll be no Santa Claus this year."...
nytimes.com
September 4, 2001
Market Fallout: Year-End Bonuses Are No Longer Routine
By REED ABELSON
As senior executives review their companies' results for the year, they are facing an ugly reality. Given the economic downturn and the poor performance of the stock market, many employees, particularly managers, will probably receive drastically lower bonuses at the end of the year or early 2002.
Companies are now deciding whether to tell employees and their shareholders months ahead of when they would normally find out, according to compensation consultants. Already, Ford Motor (news/quote), Sun Microsystems (news/quote) and Media General (news/quote) have warned some employees not to expect bonuses.
"I think there are a lot of companies that will get out in front," said Scott Olsen, a practice leader at Towers Perrin, a human resources consulting firm. He said that in addition to making sure employees know what to expect, a company can signal its commitment to keeping costs in line.
In recent years, bonuses based on a company's performance have become a growing part of employee compensation. On Wall Street, which has long been associated with large bonuses, there are already rumblings about deep cuts in an effort to control expenses. Charles Schwab has said its employees are unlikely to see anything in the way of cash bonuses this year. Media and technology companies also rely heavily on bonuses.
Because of the strength of the economy and the stock market in recent years, employees have come to rely on the extra income and have adjusted their lifestyles, said Edward E. Lawler III, a business professor at the University of Southern California.
What companies may not have done, Mr. Lawler said, is help employees manage their expectations and plan for the time when they would take home far less.
But some companies are choosing to retain bonuses to motivate workers, and few companies will probably reduce all bonus pay, consultants said. Many plans are designed so that individual performance, aside from how the company might be doing, is still rewarded.
"We're just trying to find a balance," said Lee D. Roberts, the chairman of FileNet Corporation (news/quote), a software company in Costa Mesa, Calif. When a change in its bonus plan meant that employees would not get bonuses this summer, FileNet chose to go ahead and pay them under the original plan so they would have time to adjust. Mr. Roberts is concerned that abolishing bonuses will hurt morale and his ability to keep talented employees. "We're not about fixed assets," he said. "We're about people."
The announcement that there will be nothing extra will probably not come as a surprise to those affected, consultants say, given the current round of layoffs at various companies. Many are aware of how poorly their companies have been performing. "People understand and expect this even before it's announced," said Dale Klamfoth, a workplace consultant with Drake Beam Morin in New York.
With four months left in the year, many companies are still in the middle of deciding about bonuses. "We're talking about 2001 performance," said Ed Freher, a senior executive compensation consultant at William M. Mercer, a human resources consulting firm. "Most companies have not made up their minds."
But there is pressure to eliminate expenses wherever possible. By having the flexibility to cut bonuses when performance is poor, companies have another tool to bolster earnings. "It's the swing variable," said Ira T. Kay, a practice director for Watson Wyatt Worldwide. "The employees understand, and it's fair to shareholders."
But the effect on the economy is less than clear. In previous downturns, layoffs provided a fairly immediate hit to the economy. A loss of discretionary pay may filter through the economy much more slowly.
"There should be much more of a lag effect in taking money out of circulation," Mr. Lawler said.
As much as $30 billion is paid each year in variable employee compensation, according to Morgan Stanley Dean Witter (news/quote).
Some compensation consultants say salaries may also be affected. To reduce expenses or avoid layoffs, some companies have told their employees to take a cut in salary. In May, Agilent Technologies (news/quote) cut the pay of employees by 10 percent for the rest of the year.
Though a survey last month by WorldatWork, a nonprofit professional compensation association, suggested that salaries would rise by about 4.5 percent next year, there are numerous cases of no salary increases and in fact pay cuts, said Bill Coleman, senior vice president of compensation for Salary.com, which tracks compensation.
The executive suite is not likely to be spared. At Ford, Jacques A. Nasser, who received a bonus last year of nearly $8 million, is among the 6,000 managers at Ford who will not receive a bonus in 2001, nearly half of his compensation last year.
The compensation of chief executives rocketed during the stock market boom. But many should receive stock packages worth significantly less as well as lower bonuses after this year's weak performance, consultants say. Companies will probably not increase the number of shares awarded to make up for lower share prices, and directors will probably exert considerable pressure to limit the pay of executives.
"This is the time where the symmetry of the pay model will be proven either true or false," said Mr. Kay of Watson Wyatt.
Compensation consultants point out that this is how these plans are supposed to work. "If the bonus doesn't go down or even hit zero, it isn't a variable plan," said Mr. Coleman of Salary.com. "It's more of an entitlement."
Companies emphasized that part of the motivation was not to surprise employees. At Media General, which told 3,200 of its 8,000 employees that they would not receive a holiday bonus, employees had come to expect extra pay, even though they knew it was not guaranteed.
"You don't want to wait until the day before Thanksgiving to say that there's not going to be a Christmas bonus this year," a company spokesman, Karl Rhodes, said.
KJC |
