retention strategies during difficult economic...

Retention strategies during difficult economic conditions Results from a new Deloitte Survey

About the surveyThis survey was conducted in September 2008 and closed at the end of the month. At that time, the market was down 25% year to date. The survey generated 151 responses from companies of all sizes in all industries. See the demographic information about our participants at the end of this report.

Retention Strategies duringDifficult Economic Conditions

1

The Challenges Many companies are currently facing particular challenges retaining their valued employees:

•Long-termincentivesmayhavelostvalueduetothedeclining stock market

•Commoditypriceshaveloweredcompanyprofitability,reducing the potential for payouts from annual incentive plans

•Consumersarepurchasingfewerproductsandservices,reducingopportunitiesforcompanygrowth

Thesecompaniesaresearchingforwaystohelptheiremployeesfeelvaluedandmotivatedwhilestilladheringtotheirexistingcompensation philosophies and principles. Deloitte’s survey wasdesignedtocapturewayscompaniesareapproachingthisproblem.Over150companiesresponded.

How are companies faring?Atthetimethisreportisbeingwritten,thestockmarketisdown25%ormoreoverthepasttwelvemonths.Thecompaniesparticipatinginthissurveyhavebeensimilarlyhardhit–overone-halftoldustheircompany’sstockisdown10%ormore.Only20%ofcompanieshavemanagedtoseeanincreaseintheir stock price this year. (See Figure 1)

Companyearningshavealsobeenhit,butnotnearlyasbadlyasstocks.Nearlyone-thirdofcompanieshaveseenanincreaseintheirearningspershare(EPS)overthepasttwelvemonths.However,47%haveseentheirearningsdecline,including27%whohaveseenadecreaseinexcessof ten percent. (See Figure 2)

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Figure 1. How has your company’s stock price changed over the past 12 months?

5%

14%

10%

7%

3%

18%

7%

38%

Up 10% or more

Up 5% – 10%

Up 0% – 5%

Unchanged

Down 0% – 5%

Down 5% – 10%

Down 10% – 20%

Down 20% or more

Figure 2. What has been the effect of recent economic conditions on your company’s earnings per share (EPS) over the past 12 months?

11%

10%

13%

6%

13%

22%

9%

17%

Up 10% or more

Up 5% – 10%

Up 0% – 5%

Unchanged

Down 0% – 5%

Down 5% – 10%

Down 10% – 20%

Down 20% or more


2

Compensation plans are being hitTakentogether,decreasedearningsandafallingstockpricewilldestroythevalueinmostcompanies’annualincentiveandlong-termincentiveplans.While41%ofcompaniesexpecttheirannualincentiveplanstopayoutatorabovetarget,fully58%expectapayoutbelowtarget.Elevenpercentofcompaniesbelievethattheircurrentannualincentiveplanwillnotyieldabonusatallthisyear.(SeeFigure3)

Amongthosecompaniesofferingstockoptions,thenewsisalsodismal.Sixty-threepercentofcompaniesreportthatallormostoftheirstockoptionsgrantedwithinthepastfiveyearsarecurrently“underwater”(i.e.,theexercisepriceisabovethecurrentstockprice.)(SeeFigure4)Employeeswillneedtoseeasignificantriseintheircompany’sstockpricebeforetheirstockoptionswillhaveanyvalueatall.

Figure 3. Based on your company’s current performance, at what level are your company’s annual incentive plans likely to pay out for the current fiscal year?

21%

4%10%

27%

27%

10%

Significantly above target (>125% of target)

Some what above target (105% – 125% of target)

At target (95% – 105% of target)

Some what below target (75% – 95% of target)

Significantly below target (<75% of target)

Zero payout


3

How are companies reacting?Companiesareclearlyfeelingtheneedtotakestepstoretaintheirvaluedemployeesduringthisdifficulttime.Approximately40%ofthecompaniesrespondingtooursurveyhavealreadyimplementedaretentionprogram;anotherone-thirdofcompaniesaretakinga“waitandsee”approach.Only27% of companies told us they currently have no plans to adopt anyretentionprograms.(SeeFigure5)

Ifacompanydoesnotplantoimplementaretentionprogram,whataretheirreasons?Themajorityofthesecompaniestoldusthatretentionhasn’tbeenanissuefortheminthiseconomy.Perhapsthey’reinanindustrythathasseenalotofjoblossesandemployeesareholdingontothejobstheyhave.Othercompaniesforeseeapossibledownsizinginthenearfuture,soimplementinga retention program doesn’t currently make sense. The position ofmanyofthesecompaniescanbesummedupinthecommentsmadebyoneparticipant,whotoldus,“Retentionhasn’tbeenaproblemforusyet,butwearewatching.Affordabilityisalimitingfactorifwedoneedtodosomething.”(SeeFigure6)

Figure 4. What percent of your stock option grants made within the past five years are currently “underwater”?

23%19%

7%

11%

40%

None

Less than 25%

25% – 50%

50% – 99%

100% (All)

Figure 6. If your company has no plans to implement a retention program, what is your primary reason?

3%

8%

68%

13%

10%

Retention hasn’t been an issue for us

We may need to down size

We can’t afford it

Shareholders reaction

Other

Figure 5. Has your company implemented any retention programs for your employees?

Yes, for senior executives

Yes, for middle managers and above

Yes, for certain business units

Yes, for all employees

Not yet, but we might depending on conditions

No, we have no plans to do so

0%

5%

10%

15%

20%

25%

30%

35%

18%19%

17%

7%

33%

27%


4

Companiesthathavetakenactionfeelcompelledtostemthetideoflowemployeemoraleandtheresultinghighturnover.Manycompaniesfeelvulnerabletothepressurefromothercompaniescompetinginthewarfortalent.(SeeFigure7)

Theretentionprogramscurrentlybeingimplementedbythesecompanieswilltakemanyforms.Manycompaniesarehesitantto“changetherulesofthegame”inthemiddleofaperformanceperiod(eitherannualorlong-term).Themostprevalentresponsewastocreateastand-aloneretentionprogramfortheexecutiveandemployeegroupsthesecompaniesaremostconcernedaboutretaining.(SeeFigure8)

Changing the current plansThevastmajorityofcompanies(78%)arenotplanningtochangethis year’s annual incentive plan midstream. The companies that arewillingtomakemodificationsaretakingavaried,sometimeshighlyindividualizedapproach:

•Somewillmodifytheperformancetargetsbutkeepthesameperformancemeasures(6%),liketheparticipantwhotoldus,“wewilladjusttargetsbasedoninflationarypressuresincertainglobalregions.”

•Otherswillchangetheperformancemeasuresused (e.g.6%ofrespondentsindicatedachangefromrevenue/profitmeasurestostrategic/operational/individualgoals)

•Afew(3%)willcreateanewplanforthesecondhalfoftheyear.Oneparticipant“mayofferspecial2nd-halfplansforcertaingroupsonly.”Anothercompany“didamid-yearpayout.WechangedthepercentofbonustiedtoEBITDAsoitwasmorelucrativeforemployees.Manydivisionsdidnotreachgoal.”

Figure 7. What factors influenced your company’s decision to implement a retention program?

Peer company practices

Board of Director concerns

Shareholder reactions

Public/customer reactions

Other*

39%

26%

*Includes employee morale, turnover, management concerns, etc.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

7%8%

33%

Figure 8. What form will your company’s retention program(s) take?

Modify the current AIP to improve the payout

Modify next year’s AIP to improve payout

Modify the LTI to improve the payout

Create a stand-alone retention program

Other

0%

5%

10%

15%

20%

25%

30%

35%

14%15%

26%

32%

5%


5

•Stillfewer(2%)willadjustforunbudgetedexpenseincreases due to higher commodity prices.

•Anumberofcompanies(8%)couldnotcategorizetheirapproachduetotheindividualizednatureoftheirchanges.Oneparticipantsaid,“Wemayfundindividualbusinessunitsbasedontheirownperformance,andspecialpaymentsforhigh-performingindividuals.”Anothercompanycreateda“specialretention/incentiveprogramforafewkeyindividualsmostatrisk.”

Evenfewercompaniesarewillingtomakechangestotheircurrentstockoptionorlong-termperformanceplans.Oursurveyfoundthatfewerthan5%ofcompanies,ifany,companiesareplanninganyofthefollowingchanges:

•Re-pricingcurrentstockoptiongrants•Cancelingandre-issuingcurrentlyoutstandingoptionsoneithera1-for-1oravaluebasis

•Acceleratingfutureoptiongrants•Adjustingeithertheperformancetargetsormeasuresof

performance plans currently in cycle

Changes for next yearWhilecurrentincentiveplansarelikelytoremainstaticformostcompanies,changeswillbecomingin2009tohelpreassureemployeesthattheirbonusopportunityisworthstrivingforandhasarealisticpossibilityofpayment.Forexample,overone-half(53%)ofcompaniesareplanningtoadjustnextyear’sannualincentiveplansduetocurrenteconomicconditions,includingone-thirdofcompaniesthatwillmodifytheperformancetargetswhilekeepingthesameperformancemeasures.Another14%willactuallychangetheperformancemeasures,suchasincludingmorestrategic,operationalorindividualgoals.Similarly,anoticeablenumberofcompanieswithperformanceplans(19%)willmodifytheperformancetargets for upcoming plan cycles.

Stand-alone plansInkeepingwiththehighlyindividualizednatureoftheplannedretentionprograms,manycompanies(22%)willcreateastand-alonebonuspoolfor2008.Thesepoolsallowcompaniestheflexibilitytorewardemployeesandbusinessunitsthathaveshownexceptionalperformance,despitethecurrent economic environment. Most companies are keeping thepoolrelativelysmall,fundingitwith25%orlessoftheannualincentivepooltargetawards.(SeeFigure9)

Figure 9. What is the size of your discretionary bonus pool (as a percent of the annual incentive plan target award)?

4%

14%

62%12%

8%

Up to 25%

26%-50%

51%-75%

More than 75%

Other


6

Mostofthecompanies(79%)thatarecreatingdiscretionarybonuspoolswillpayawardsincash,whiletheremainderwillpayawardsinbothcashandstock.Individualperformancewilldeterminepayoutsformostcompanies,althoughothermethodswillalsobeused.(SeeFigure10)

Aslightlysmallerpercentageofcompanies(18%)plantocreateastand-alonelongertermincentiveplan.Likethediscretionaryplans,mostwillpayawardsincash,althoughsomewillusestockorrestrictedstockunits.Theseplanswillspantwotofiveyears.Theyaretypicallyhighlytargetedtokeyexecutiveoremployeegroupsdeemedtobeatparticularriskofleavingtheirrespectivecompanies.Someplansspecificallyexcludeseniorexecutivesandfocusonmid-levelmanagersorhighlyspecializedfunctions,suchasIT.

Figure 10. How will you determine payments of awards from the discretionary pool?

Company performance relative to a peer group

Company performance relative to interim goals

Achievement of strategic or operational milestones

Individual performance

Other

11%

29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

79%

36%

11%


7

Other plansWhatelseisunderconsideration?Veryfewcompaniesplanonmakingmodificationstotheirexistingdeferredcompensationplan,suchassuspendingfuturedeferrals,fundingbenefitsinaseculartrust,orterminatingtheplananddistributingbalances.Asmallnumberofcompanies(6%)willallowparticipantstomodifyexistingdistributionelectionspriortoyearendasallowedundertheSection409Atransitionrules.

Similarly,veryfewcompaniesplantoimplementanewornewly-modifiedseveranceplan.Fewerthan14%ofcompanieshave adopted or changed their severance plan in response tocurrenteconomicconditions.Amongthefewcompaniesthathave,anearlyequalnumberhavemadechangesjustforexecutivesashavemadechangesforallemployees.

Companiesarewiselytryingtoeasethestrainonemployeesbyimprovingtheirworkenvironment.Manycompaniesareimplementingorexpandingworkforceprogramsthataredesignedtomakebalancingworkandfamilyeasier.Theseincludeflexibleworkschedules,telecommutingandcompressedworkweeks.(SeeFigure11)Whiletheseprogramswon’tputdollarsinemployees’pockets,theycangoalongwaytowardhelpingemployeesviewtheircompanymorefavorably,makingthemlesslikelytoleave.

Figure 11. Has your company considered implementing or expanding any other workforce programs to help retain employees?

Flexible work schedules

Telecommuting

Compressed work weeks

Part-time work

Subsidies for commuting costs

Paid leaves of absence/sabbaticals

Other

None of these

59%

46%

0%

10%

20%

30%

40%

50%

60%

70%

26%

34%

10%7%

29%

3%

Figure 12. What is your company’s primary industry?

4%

3%

3%

9%

12%

11%

11%

9%7%

6%

12%

5%

5%

4%

High Technology

Manufacturing

Business Service and Consulting

Financial Services

Trade – Wholesale/Retail

Insurance

Health Care and Pharma/Life Sciences

Real Estate/Architecture/Engineering/Construction

Telecommunications/Media

Aerospace/Defense and Automotive

Utilities

Consumer Products

Transportation

Other


8

Figure 13. What is your company’s revenue during the most recent fiscal year?

12%

8%

13%

10%

28%

6%

24%

Less than $100 million

$100 – $500 million

$500 million – $1 billion

$1 – $5 billion

$5 – $10 billion

$10 – $20 billion

Greater than $20 billion

Figure 14. Approximately how many employees does your company have?

7%

13%

26%

7%

17%

30%

Fewer than 500

500 – 1,000

1,000 – 2,500

2,500 – 5,000

5,000 – 10,000

More than 10,000

Figure 15. Is your company:

33%

4% 3%

60%

Other

Publicly traded

Privately owned

Not for profit or government

For more information, please contact: Michael S. KesnerHumanCapital–TotalRewardsDeloitteConsultingLLPTel:[email protected]

Memberof Deloitte Touche Tohmatsu

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Copyright © 2008 Deloitte Development LLC. All rights reserved.

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