Market Collapse Underlines Vulnerability of Cash Incentives, Study Says
October 29, 2008
A new study by consulting giant Deloitte finds underwater stock options and diminishing incentive pay schemes are hurting corporate morale
By Jeanie Casison
Yet another reason cash is a poor motivator: employees come to see it as part of the pay, not a special reward for good work. And when bad economic times force companies to reduce or eliminate those payments, or when, in the case of stock options a tumbling market makes those optiond worthless, a motivator has turned into a demotivator.
According to a new Deloitte survey, "Retention Strategies During Difficult Economic Times," 59 percent of the U.S. companies surveyed anticipate that their annual incentive plans will pay out below target, and 11 percent expect no pay out at all. Of those companies offering stock options, 63 percent reported that all or most of the stock options granted in the last five years are "underwater."
The frightening financial picture serves as a wake-up call for corporate leaders concerned with motivating and retaining their workers. Michael Kesner, a principal within Deloitte Consulting's Human Capital Practice, says that the downturn can not only have a significant impact on incentive pay, but on employee morale, especially when job security concerns are added to the mix.
Short-term fixes don't seem to be the answer, with the majority of respondents (78 percent) indicating that they do not plan to change their annual incentive plans midstream. Instead, they are looking to 2009 to make modifications. Specifically, 53 percent of companies are planning to adjust next year’s annual incentive plans due to current economic conditions. One-third of companies will modify the performance targets while keeping the same performance measures; while another 14 percent will actually change performance measures to include more strategic, operational or individual goals.
Alternative work arrangements are another option, with 59 percent considering implementing or expanding flexible work schedules, telecommuting (46 percent), compressed work weeks (34 percent), part-time work (26 percent) and/or subsidies to help defray the costs of commuting (10 percent).
"Each company needs to address this situation in a way that best fits their corporate culture, board preferences and investor base," Kesner says. "Some companies will see fit to do nothing—a deal is a deal, and if performance is off, you take a pay cut, regardless of the reasons for the fall. Others will try to address motivation and retention concerns very selectively. Most will address the issue prospectively."
A complete copy of the report is available at www.deloitte.com/us/retentionsurvey08.
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