In an unstable job market, compensation rates can be as volatile as job security. How are managers restructuring compensation, and what changes can employees expect to see in salaries and benefits?

With unemployment rates at near-record highs, mounting competition among applicants for a limited number of openings and pay freezes across a range of industries, the prospect of gaining a raise or even maintaining one’s salary at its current level seems unpromising. As many managers are forced to lower expenses, the cutbacks are increasingly extending to employee compensation.

Pay freezes have become much more common. A recent survey of large organizations by Hewitt Associates found that 48 percent of companies implemented salary freezes in 2009, compared to 2 percent in 2008. However, only 13 percent plan to initiate or continue the freezes for 2010, and among those, two-thirds already have one in place.

Despite the prevalence of salary freezes, some raises are still being distributed, albeit modestly. The average base salary increase for salaried employees was 1.8 percent in 2009 and is expected to rise to 2.7 percent in 2010. Salaried non-exempt workers saw increases averaging 1.9 percent this year, with a 2.6 percent upswing forecast for 2010.

Increases for nonunion hourly workers came in at 2 percent and union workers received boosts of 2.2 percent, while both are expected to rise to 2.7 percent in 2010. Executives saw the smallest gain, about 1.4 percent, which may rise to 2.6 percent next year.

Although they show that pay hikes are still possible in today’s economy, the average salary increases for 2009 and those projected for 2010 are the lowest since Hewitt Associates began tracking the data in 1976.

In fact, according to a recent release from the U.S. Department of Commerce, private wage and salary disbursements actually fell by a total of $39.9 billion in May and June, with the goods-producing industries’ payrolls shrinking by $11.1 billion and manufacturing payrolls by $6.7 billion in June alone.

The combination of high unemployment and low inflation has created an imbalanced job market in which wages and benefits are increasingly sacrificed for job security.

“It was only a few years ago that the top concern for many employers was finding qualified candidates to fill open positions. Now, those same companies not only have the pick of top applicants — they don’t have to overpay to land them. Clearly, the old rules do not apply,” notes Inc.com.

In the current employment climate, cutting back on compensation has become a more viable and often necessary measure for reducing expenses and preserving jobs. According to a recent survey from consulting firm Watson Wyatt, approximately 15 percent of companies instituted pay cuts as part of their compensation restructuring efforts, while 24 percent reduced bonuses and 55 percent placed restrictions on overtime.

But salary isn’t the only form of compensation being scaled back. Indirect compensation, such as healthcare and benefits plans, is also facing reductions in lieu of, or sometimes in addition to, pay cuts.

According to a survey from the Society for Human Resource Management, HR professionals claimed the proportion of company payrolls reflecting benefits increased by 26 percent for voluntary benefits, 18 percent for mandatory benefits and 10 percent for time-not-worked benefits (such as vacation pay) in 2009.

As a result of the elevated payroll burden, certain benefits are being rolled back. For example, 2 percent of companies that provide dental insurance are planning to reduce or eliminate the benefit within the next 12 months, with similar cutbacks on prescription drug coverage (4 percent), preferred provider organization (PPO) plans (6 percent), vision insurance (3 percent) and HMO plans (4 percent).

Likewise, between 8 percent and 9 percent of companies are planning to phase out incentive bonus plans, 3 percent are cutting retirement savings plans, 2 percent are cutting life insurance and on-site parking, 7 percent are cutting graduate and undergraduate educational assistance and 9 percent are eliminating sign-on bonuses.

Although reducing compensation may seem like a necessary step for weathering the recession, it may turn out to be advantageous on an individual level rather than a macroeconomic one and, curiously enough, further destabilize the job market.

As the New York Times asserts, “workers at any one company can help save their jobs by accepting lower wages, but when employers across the economy cut wages at the same time, the result is higher unemployment.”

This paradoxical effect derives from the fact that widespread compensation reduction doesn’t create a competitive advantage for any segment of a given market. Moreover, lower wages can drive up consumer debt and curtail spending, ultimately hurting overall sales. Of course, companies must focus on their immediate priorities, but by cutting compensation now, they may end up losing more over a longer period later on.

Resources

…While Salary Increases Were Lowest in 33 Years, Variable Pay Awards Reached an All Time High in 2009
Hewitt Associates, Aug. 11, 2009

Personal Income and Outlays: June 2009
U.S. Department of Commerce, Aug. 4, 2009

Special Financial Report: Employee Compensation
by Darren Dahl
Inc.com, July 1, 2009

2009/2010 U.S. Strategic Rewards Report
Watson Wyatt Worldwide, July 21, 2009

2009 Employee Benefits
by Shawn Fegley, et al.
Society for Human Resource Management, June 2009

Falling Wage Syndrome
by Paul Krugman
New York Times, May 3, 2009