As senior executives review their companies' results for this year, they are facing an ugly reality. Given the economic downturn and the poor performance of the stock market, many employees, particularly managers, will probably receive drastically lower bonuses at the end of the year or early 2002.
Companies are now deciding whether to tell employees and their shareholders months ahead of when they would normally find out, according to compensation consultants. Already, Ford Motor, Sun Microsystems and Media General have warned some employees not to expect bonuses this year.
"I think there are a lot of companies that will get out in front," said Scott Olsen, a practice leader at Towers Perrin, a human resources consulting firm. In addition to making sure employees know what to expect, the company can signal its commitment to keeping costs in line.
In recent years, bonuses based on a company's performance have become a growing part of employee compensation. On Wall Street, which has long been associated with giant bonuses, there are already rumblings about deep cuts in an attempt to control expenses. Charles Schwab has said its employees are unlikely to see anything in the way of cash bonuses this year. Media and technology companies also rely heavily on bonuses.
Because of the strength of the economy and the stock market in recent years, employees have come to count on the extra income and have adjusted their lifestyles, said Edward E. Lawler III, a business professor at the University of Southern California. What companies may not have done is help employees manage their expectations and plan for the time when they would take home far less, he said.
But some companies are choosing to retain bonuses to motivate workers, and few companies will probably take the draconian step of reducing all bonus pay, according to consultants. Many plans are designed so that individual performance, aside from how the company might be doing, is still rewarded.
"We're just trying to find a balance," said Lee D. Roberts, the chairman of FileNet Corp., a software company in Costa Mesa, Calif. When a sudden change in its bonus plan meant that employees would not get bonuses this summer, FileNet chose to go ahead and pay them under the original plan so they would have time to adjust.
Roberts is concerned that abolishing bonuses will hurt morale and his ability to keep talented employees. "We're not about fixed assets; we're about people," he said.
The announcement that there will be nothing extra probably will not come as a surprise to those affected, say consultants, given the current round of layoffs at various companies. Many are aware of how poorly their companies have been performing. "People understand and expect this even before it's announced," said Dale Klamfoth, a workplace consultant with Drake Beam Morin in New York.
With four months to go this year, many companies are still in the middle of making decisions about bonuses. "We're talking about 2001 performance," said Ed Freher, a senior executive compensation consultant at William M. Mercer. "Most companies have not made up their minds."
But there is clear pressure to eliminate expenses wherever possible. By having the flexibility to cut bonuses when performance is poor, they have another tool to bolster their earnings. "It's the swing variable," explained Ira T. Kay, a practice director for Watson Wyatt Worldwide. "The employees understand, and it's fair to shareholders."
The economic impact is less than clear. In previous downturns, layoffs provided a fairly immediate hit to the economy. A loss of discretionary pay may filter through the economy much more slowly. "There should be much more of a lag effect in taking money out of circulation," Lawler said.
As much as $30 billion is paid out each year in variable employee compensation, according to Morgan Stanley Dean Witter.
Some compensation consultants say salaries may also be affected. To reduce expenses or avoid layoffs, some companies have told their employees to take a cut in salary. In May, Agilent Technologies gave its employees a 10 percent reduction for the year. Though a survey by WorldatWork earlier this month suggested that salaries would rise by about 4.5 percent next year, there are numerous cases of no salary increases and in fact pay cuts, said Bill Coleman, senior vice president of compensation for Salary.com, which tracks compensation trends.
The executive suite is unlikely to be spared. At Ford, Jacques A. Nasser, who received a bonus last year of nearly $8 million — nearly half of his total compensation last year — is among the 6,000 Ford managers who will not receive a bonus this year.
The compensation of chief executives rocketed during the stock market boom. But many should receive stock packages worth significantly less as well as lower bonuses after this year's weak performance, consultants say. Companies will probably not increase the number of shares awarded to make up for lower stock prices, and boards of directors will probably exert considerable pressure to limit senior executives' pay.
"This is the time where the symmetry of the pay model will be proven either true or false," said Kay of Watson Wyatt.
Compensation consultants point out that this is how these plans are supposed to work. "If the bonus doesn't go down or even hit zero, it isn't a variable plan," said Coleman of Salary.com. "It's more of an entitlement."
Companies emphasized that part of their motivation was not to surprise their employees. At Media General, which told 3,200 of its 8,000 employees that they would not receive a holiday bonus, employees had come to expect extra pay, even though they knew it was not guaranteed.
"You don't want to wait until the day before Thanksgiving to say that there's not going to be a Christmas bonus this year," said Karl Rhodes, a company spokesman.