Attempting to cut labor costs without resorting to layoffs, many companies are cutting pay increases and slashing annual bonuses instead. Employers are also using four-day workweeks, unpaid vacations and flexible work schedules as cost-cutting measures. These measures come at the heels of the unemployment claims reaching a 26-year high.

Those fortunate to still be employed will not be seeing much increase in 2009, according to several reports. A July Business & Legal Reports (BLR) survey found that the planned average merit pay increase for next year is 2.8 percent, down almost 25 percent from the 3.71 percent increase employers initially predicted in June.

Bob Brady, CEO of BLR, commented, "To see a 25 percent drop in salary increases, the lowest seen since 9/11, in the space of just a month is unheard of. Let's hope that the markets calm down and confidence improves, but even if they do, BLR expects that most organizations are likely to follow through on these reduced percentages."

Along with decreasing merit pay, 24.4 percent of respondents said they will freeze raises and 15.3 percent will delay the effective day of raises.

A Watson Wyatt survey found similar results, with companies slashing pay budgets due to economic hardship. Of the 248 surveyed companies, 28 percent have reduced their merit pay budgets and the projected raise is 2.5 percent for 2009, down from 3.7 percent.

"Employers are still sorting out the impact of the economic crisis, but changes are clearly in the wind," said Paul Platten, global practice director of Watson Wyatt's human capital group. "As they respond to the new environment, companies will have to balance how to control costs, maintain employee morale and prepare for future staffing challenges."

Many companies (46 percent) anticipate that their employees will be understanding of the paltry pay increases, if any, given the current business conditions. A few (6 percent) expect turnovers as a result, says Hewitt Associates (via MarketWatch).

Hewitt's most recent salary survey found that half of the companies polled are planning on changing their salary plans. Those companies plan on dropping the average salary increase to below 3 percent, the lowest average since Hewitt started its salary survey in 1976.

Seventy-three percent of the companies that are changing plans are doing so because the "change is needed due to business results," MarketWatch reports.

Executives will receive an average pay rise of 2.2 percent, salaried employees exempt from overtime pay to get 2.5 percent, salaried nonexempt workers to get 2.6 percent and non-union hourly employees to get 2.5 percent.

In the Hewitt survey, companies not planning on making changes say the average increase for executives will be 3.8 percent, 3.7 percent for salaried employees and 3.6 percent for non-union hourly employees.

Taking into account all companies in the survey, the average pay increase for 2009 will be 3 percent, down from the 3.8 percent found in Hewitt's July survey.

Of all the industries, automotive will have the steepest drop in increases, Hewitt says. Salaried workers are forecast to have a 1.4 percent increase, down from the 3.5 percent car companies predicted in July. Executives' pay hikes will drop to 1.3 percent from the 4 percent projected in July.

Unfortunately, the cost cutting doesn't stop at wages. The aforementioned Watson Wyatt survey indicates that 25 percent of the respondents planned to raise employee contributions to health care plans. In response to this, a different Watson Wyatt survey released Dec. 10, found that employees were willing to pay more money out of their paycheck to keep health care costs down. Last year, 38 percent were willing to pay higher premiums.

The survey also noted that many were delaying doctor visits until they had serious symptoms, skipping appointments and medication, and avoiding filling prescriptions to save money. Two-thirds of respondents were trying to reduce health care costs by taking better care of themselves.

A similar study by the Kaiser Family Foundation found that 36 percent of U.S. residents delayed medical care because of cost, 31 percent have skipped a test or treatment and 27 percent did not fill a prescription.

About 33 percent of respondents said that they had problems with paying medical bills, up from 25 percent in 2006, and almost 50 percent delayed or cut back on needed care due to cost, the survey says. According to a study by actuarial firm Milliman (via Workforce Management), employees pay an average of $397 more annually in premiums and $276 more in coinsurance and deductibles.

But it's not just employees who are stung by health care costs. The Milliman study also found that employers pay an additional 10.6 percent more (or $1,115) for a family of four's medical premium, to help doctors and hospitals make up for lower payments the get from Medicare and Medicaid. Using data from 2006 and 2007, Milliman estimates the annual cost shift to employers is $88.8 billion.

The good news on health care is that, while most people bemoaned the so-called "sweeteners" that were part of the $700 billion financial bailout passed by Congress in October, one little-reported surprise was that the plan included the passing of the Mental Health Parity and Addiction Equity Act of 2008. Under this bill, employers that provide insurance coverage for the treatment of physical illnesses must now do so on an equal basis for mental-health coverage, beginning when plans renew after October 2009.

Along with freezing wages and pushing part of the health care costs to employees in order to cope with business losses and costs, businesses also are trimming 401(k) contributions. "In a 401(k) plan ... the employer has much greater freedom to stop matching contributions when times are tough," the New York Times notes. "The contributions are normally measured as a percentage of payroll, and the savings from any cuts are realized immediately."

Typical employer match programs have employers matching 50 cents of every dollar their employee sets aside in their retirement accounts. Employees can put in up to 6 percent of his or her paycheck. While the match percentage varies per employer, the employer's cost usually works out to about 3 percent of payroll, the New York Times explains.

Companies have been replacing traditional pension plans with 401(k)s because it allows employers to stop matching contributions at will, whereas with a traditional pension, federal rules set a firm contribution schedule, with deadlines and penalties for companies that fall behind, the New York Times adds.

With companies slashing their contributions to their employees' futures, dampening pay rises and shifting health care costs to employees, the 2009 compensation landscape looks bleak, but it could always be worse. As Alicia Munell, director of the Center for Retirement Research at Boston College, put it to the New York Times, "These are really hard times and people are losing their jobs, and in some ways, a suspension of a 401(k) match, while bad, is probably one of the lesser evils out there."

Resources

Fewer Layoffs, but More Pay Freezes
by Garry Kranz
Workforce Management, Nov. 18, 2008

More Companies Are Cutting Labor Costs Without Layoffs
by Matt Richtel
The New York Times, Dec. 21, 2008

In Need of Cash, More Companies Cut 401(k) Match
by Mary Williams Walsh and Tara Siegel Bernard
The New York Times, Dec. 20, 2008

2009 Pay Increase Survey: Results
by Steve Bruce
Business & Legal Reports, Oct. 26, 2008

Employers Make Hiring, Salary, Benefits Changes Thanks to Economic Crisis
World at Work, Oct. 24, 2008

Paltry Pay Hikes Ahead
by Andrea Coombes
MarketWatch, Dec. 16, 2008

Closing the Gap 2008-2009 Employee Perspectives on Health Care
Watson Wyatt, Dec. 10, 2008

Kaiser Daily Health Policy Report
Kaiser Family Foundation, Oct. 22, 2008

Report: Employers Subsidize Public Health System by $88 Billion
by Jeremy Smerd
Workforce Management, Dec. 9, 2008