Employers Look to Restore Pay Cuts, 401(k) Matches

Aug. 19, 2009— -- For beleaguered employees who were able to avoid layoffs but had to swallow salary or benefit cuts, relief may be in sight.

In the coming months, more employers are looking to reverse employee concessions and HR program cutbacks, according to the latest bi-monthly report from consulting firm Watson Wyatt.

Its August survey of 175 large employers found that 33 percent who had announced salary freezes planned to rescind them in the next six months, an increase from 17 percent in June. Some 44 percent of employers said they plan to restore salary cuts, up from 30 percent two months ago. And 24 percent plans to restart matching contributions to 401(k) retirement plans, compared with just 5 percent in June.

That's good news for people like Lynn Elliot, 41, who works at Atlanta-based Zep Inc. Her company has cut jobs and costs in the recession, but she managed to stay employed. She did lose 401(k) matching funds of 50 cents of every dollar she contributed to her retirement account.

"With the economy and companies having to cut back on certain things, I understood and I knew that the company was making the right moves," said Elliot, a credit supervisor at Zep.

But after seeing increased profits, Zep, a leading maker of cleaning products, announced last month it would reinstate a portion of its 401(k) matches.

"We started to see some progress and some return to profitability in the business," said John MacDonald, an HR manager at Zep. "We wanted to show that to employees and show them that progress we've made."

Whether more employers follow through on their plans to restore the pay and benefits remains to be seen, but the survey is a positive sign. It all depends on when the economy recovers.

"We've gotten to a place in the recession where about half of the companies that take part in our survey feel like results have already bottomed out or may bottom out in the next three months, and beyond that things may begin to improve," said Laura Sejen, global director of strategic rewards consulting at Watson Wyatt.

Compensation, easily the most important factor in attracting employees, is among the last things struggling employers look to cut. To restore these concessions, employers must be confident in their financial capability to do so.

"I'm pleased reports suggest that they're doing this," said Peter Cappelli, a management professor at the Wharton School of Business at the University of Pennsylvania. "It's a little sooner than I would have anticipated, it's usually the kind of thing you would see happening when one labor market starts to strengthen after companies' performance begin to improve."

Watson Wyatt's latest survey isn't all good news: the August report also found employees are in store for smaller raises, lower bonuses and higher healthcare premium costs. Additionally, employers say that more employees in the past two months are taking out hardship withdrawals and loans from their retirement accounts to weather the economic storm. Forty-three percent of employers expect to see a reduction in staff, signaling the continuation of a fairly soft job market from an employee perspective. Twenty-five percent of employers don't expect an economic recovery before 2010.

But the fact that the report's findings are "mixed" is a good sign, Sejen said.

The American economy has lost 6.7 million jobs since the recession began in December 2007. The number of jobs lost in July—247,000—was lower than expected, signifying a drop from June's record-high 9.5 percent jobless rate, the first decline in more than a year, reported the U.S. Department of Labor two weeks ago.

"The worst may be behind us," President Barack Obama said shortly after the release of the July jobs report.

The increase in employers planning to reinstate 401(k) matches may be attributed to the number of companies preparing budgets for the 2010 year. Generally, decisions about 401(k) benefits are made in the early fourth quarter, said Nevin Adams, editor-in-chief of PLANSPONSOR magazine, which focuses on pension and retirement issues.