Firms cautious but optimistic after Sept. 11

Some expect to tighten budgets, but most hope to retain original salary increases.

Concern about the economy, magnified by the events of Sept. 11, is troubling a lot of Canadian businesses but a study conducted late last month shows they are being careful not to overreact.

In a survey, conducted by benefits and compensation consulting firm Morneau Sobeco, 18 per cent of respondents said that in light of the attacks in the United States, they would likely have to revise down original forecasts for salary increases in 2002.

That number may seem surprisingly low to a lot of people “because of all the doom and gloom and people expecting everybody to run to the hills,” said Andre Sauve, a partner and actuary with Morneau Sobeco. “But once you sit down and think about it, it is not so surprising.”

Some industries will certainly be affected a great deal, he said. But there is little reason to expect that companies not directly affected by the fallout of the attacks will have to dramatically change their forecasts.

The respondents were some of the largest participants in Morneau Sobeco’s earlier salary survey of 309 firms in August. After the attacks in the U.S., 54 of the largest participants were contacted again; of those, just nine said salary increase expectations for 2002 would drop. On average forecasts dropped by 0.9 per cent. As a result of the revisions, overall expected average salary increases for 2002 dropped from 3.3 per cent to 3.1 per cent.

Another survey from consulting firm William M. Mercer, conducted before the terrorist attacks, found companies were expecting to increase salaries by about 3.7 per cent in 2002, but Danielle Bushen of Mercer cautioned that will likely drop.

“Organizations are aggressively reviewing their expenses for the last quarter of 2001, as well as planned investments for 2002. Core expenses, such as labour, are key to this review,” she said.

”It may be easy to overreact but we also should not underestimate the gravity (of the situation),” said Sauve, adding that some of the respondents appear optimistic in their forecasts.

There are still many things that could happen to force companies to revise their numbers even lower, he said.

Before Sept. 11, financial markets were already making people nervous and projected that increases in 2002 for many employees were down from last year. The Mercer study observes a downward trend of between 0.2 per cent and 0.8 per cent below reported increases this year.

And in the original Morneau Sobeco survey, four per cent of respondents expected an outright salary freeze for next year. By comparison, in the recession of the early 90s, as many as 25 per cent of companies were reporting salary freezes, said Sauve and last year about two per cent froze salaries.

The original study also asked about benefits and pensions. Disability management was cited as a big concern, particularly since disability claims typically increase during a recession. If businesses were considering a review of their disability management practices, now would be the time because costs are likely to go up , Sauve said. Respondents also expressed concern about the investment performance of pension plans. The average diversified pension fund has lost about 10 per cent of its value, he said. That may seem like a lot, but most sponsors should be fine since many accumulated considerable surpluses during the stock market boom of the late ’90s, and accounting rules now allow for the amortization of losses over a period of years.

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