Crisis forces companies to cut raises, bonuses and benefits

— -- Employers are drastically slashing bonuses, severance packages and pay raises next year to cut costs amid mounting concerns of a prolonged economic downturn.

While many employees understand the need for cutbacks as the economy languishes, employers risk a backlash and lowered morale if cuts hit bottom and middle-income earners while sparing executives.

"More and more Americans are noting the huge disparity in income that exists in American businesses today," says Michal Ann Strahilevitz, a business professor at Golden Gate University in San Francisco. "You want motivated employees, not angry ones. If you want to retain employee loyalty and morale, either start the cuts at the top or don't cut at all."

Cuts are being made in all areas:

•Lower pay raises. Out of 1,000 midsize-to-large companies surveyed in October, 40% plan to reduce the amount allotted for raises in 2009, according to an October survey by New York human resources firm Mercer. They surveyed a smaller sample of 250 companies to ask what the average raise would be in 2009 and found there would be a slight dip to 3.5%, from 3.7%, for those expected to receive an increase.

•Bonuses are shrinking, too. Of the companies that typically give year-end bonuses, 62% say that they will be the same or smaller than last year, according to a survey by Battalia Winston. Only 6% expect year-end bonuses to go up. About 86% of companies have bonus plans for some segment of workers, Mercer finds.

Expect less holiday cheer, too. The number of companies holding corporate holiday parties is the lowest in the survey's 20-year history. American Express recently canceled its year-end bash.

•Other cutbacks. Twenty-five percent of companies are planning a hiring freeze in the next 12 months, and an additional 25% are raising employees' contributions to health care, according to an October survey of 248 companies by Watson Wyatt human relations consulting firm.

"I think we're going to see a lot more of those reductions," says Laura Sejen, global practice director of strategic rewards at Watson Wyatt. "Ideally, this is (to reduce layoffs). Companies are definitely taking a look at a full array of programs to find ways they can cut costs. Pay and benefits are big tickets as costs to employers."