Next Year's Paycheck Looks Safe -- if Your Job Survives

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Workers worried that the nation's economic turmoil will mean they'll receive a slim merit increase in 2009 -- or none at all -- might be able to breathe a sigh of relief. A study to be released Thursday by consulting firm Mercer LLC shows that employers don't expect to make major changes to next year's salary budgets, which were mapped out in April.

But on the flip side, employers plan to trim their work forces, cut back on hiring and reduce bonus payouts, if they haven't yet done so. "They're focusing on the survivors," says Steve Gross, a global practice leader at Mercer.

Earlier this month, the New York firm looked at 2009 salary-budget projections for 190 midsize and large U.S. firms with a total of 2.8 million employees and average annual revenue of $5 billion. The majority -- 58% -- said they haven't changed their budget projections from April; 24% said they have, but plan to reduce their budgets by only one-half of a percentage point. Surprisingly, 18% said they expect to increase their budgets from the spring by one-tenth of a percentage point.

Overall, employers said they expect to boost salaries for all workers in 2009 by an average of 3.6%, Mercer says. This is down slightly from the 3.7% average increase employers said they expected to give workers in a larger survey Mercer conducted in April. Respondents in that study included 1,039 midsize and large U.S. firms with a total of more than 12 million employees and average annual revenue of $5.9 billion.

Mercer's latest findings are similar to those in new studies also to be released Thursday from Hewitt Associates Inc., in Lincolnshire, Ill., and Watson Wyatt Worldwide Inc., in Arlington, Va. Both firms say the majority of employers they surveyed earlier this month reported no changes to their 2009 salary-budget projections, and show salaries rising on average by 3.5% and 3.4%, respectively. When Hewitt and Watson conducted similar studies in the spring, both of which included larger respondent pools, salaries were expected to increase slightly more, by 3.8% and 3.5%, respectively.

But while merit increases may hold steady in 2009, workers are likely to feel the brunt of the sour economy in other ways. Mercer's study shows that 37% of employers are planning or contemplating staff reductions and that 30% already have made cuts.

Mercer's Mr. Gross says layoffs make sense for firms that don't have enough work to go around and don't expect business to return to normal for at least another 12 months. Reducing payrolls would likely outweigh the costs of training replacement workers after that much time has passed, he says.

Bonus pay is expected to be reduced. Employers plan to give out smaller year-end bonuses tied to company performance in 2009, Mercer reports. These payouts are expected to decline 20% or more across all employee groups, compared with this year. Executives are projected to fare the worst, by receiving bonuses of 35%, down from the 40% or more they received in 2008, Mercer says.

Mercer's study also shows that employers are cutting back on their recruiting activity. Thirty-two percent of employers said they plan to fill fewer vacancies, and 31% said they've already curtailed hiring or are considering doing so.

According to Watson Wyatt's study, employers are responding to the economic downturn by increasing communication on benefits and pay, implementing travel restrictions and freezing hiring all together.

Still, companies say they are sweetening the pay pot for their top talent. Mercer's survey shows that 28% of employers have added or are planning to add variable performance-based pay programs, or are making changes to existing ones. Companies may reward high performers with benefits such as restricted stock grants, spot cash payments and flexible-scheduling options.

These kinds of incentives are critical for retaining star performers in an economic slump, says Ken Abosch, North American compensation practice leader at Hewitt. "Now may be a time where you have to disadvantage the masses in order to take care of your best talent," he says. "If you don't, somebody else will."