HR responds to cost crunch with workforce cuts: survey

Smaller salary increases, fewer bonuses also used to save money

In the face of sustained pressure to contain human resource costs, organizations still overwhelmingly look to head count reductions over any other methods of cost containment, a study shows.

The survey, “HR Program Cost-Containment Initiatives,” conducted by consulting firm Hewitt Associates, polled 130 Canadian HR professionals and found four of five organizations continue to feel the pressure to contain workforce costs.

The most common options are layoffs/job eliminations and essential hires only. However, these two methods are less of an option in 2004 than they were in 2003. Last year, 55 per cent used layoffs and 46 per cent hired essential staff only. In contrast, 32 per cent of respondents said they are planning to use layoffs and 61 per cent said they’re planning to hire essential staff only in 2004.

Each of the other workforce containment measures were chosen by only about one in 10 respondents. Asked what initiatives they planned in 2004,
•nine per cent of respondents said they’re using early retirement initiatives;
•11 per cent are increasing the use of part-timers;
•13 per cent are increasing the use of contract employees;
•14 per cent are implementing a hiring freeze; and
•13 per cent are using third-party vendors for HR administration.

Respondents were mixed on cost reduction measures that relate to compensation. While 38 per cent of respondents plan to reduce salary increases in 2004, 23 per cent plan to reduce bonus and other cash payouts, and 13 per cent plan to reduce stock option offerings. Only seven per cent, however, are implementing a salary freeze.

Roughly one in five survey respondents chose ways of controlling benefits coverage as a cost containment measure. Seven per cent are eliminating or reducing coverage. And 20 per cent of respondents plan to increase employee contributions, twice as much as those who have used this measure last year. Seventeen per cent are increasing deductibles and/or co-payments in 2004, an increase from 10 per cent in 2003.

“What the survey shows is HR continues to be under pressure to reduce costs,” said Sarah Beech, Canadian benefits practice leader at Hewitt.

She added, however, that the survey does not contain any numbers to indicate whether this pressure has risen or fallen compared to several years ago.

Compared with just last year, Beech added, HR departments aren’t as inclined to lay off employees as a primary method of cost-reduction. Respondents did not favour hiring freezes, but are more strategic about the hires they make.

“Equally, when it comes to compensation, their discussion was not around freezing pay increases, but rather having lower pay increases and having more targetted pay increases for those key performers within an organization,” Beech said.

Beech urged HR departments to consider cost-reduction methods that do not jeopardize the employer’s ability to recruit and retain workers.

“There’s a need to be strategic about how (companies) reduce HR costs. As HR professionals look forward, they need to make sure that any measures they take do not directly or indirectly cause people to leave, particularly as we head into a potential skilled labour shortage in the next few years as baby boomers retire,” said Beech.

“What employers indicated in the survey is they’re also interested in controlling their group benefit costs. The focus is not in taking away programs; rather, they’re looking for ways of being more cost-effective, by introducing increased employee contributions, deductibles or co-payments, looking at vendor management, as well as changing group benefit funding arrangements,” said Beech.

“These are more strategic ways of looking at a benefit program and finding a cost-effective measure of delivering the program.”

She offered as an example one client company with about 15,000 workers that had not reviewed its group benefit plan for a long time. That’s because the company had stayed with one provider for at least 10 years. When the company went to market, it managed to save 20 per cent on premium rates and administration fees, all the while keeping the same benefit design.

The company was shocked, as were Hewitt consultants, said Beech. The lesson of the story is, it pays to shop around every few years or so.

In another example, a company with about 2,000 employees decided to consolidate coverage for its various divisions with one carrier instead of having each covered by a separate carrier. By consolidating and reviewing funding arrangements, the company found 20 per cent in savings, said Beech.

The lesson here? “Consolidating coverage with a single provider may raise an opportunity to review funding arrangements and result in a substantial cost reduction.”

Survey respondents showed little interest in touching retirement or pension plans. Only seven per cent closed defined benefit plans to new entrants and only six per cent converted to a defined contribution plan in 2003. The share of respondents planning on these two initiatives in 2004 was eight per cent and four per cent respectively.

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