The credit crunch and economic slowdown is prompting many employers to keep a close eye on spending, so Jenny Keefe looks at the impact on reward

A mid stock market turmoil triggered Employers should assess flexible working carefully to balance possible returns with managing potential risks and staff expectations, says Alison Colemanby the credit crunch and predictions from some forecasters of a full-blown recession ahead, many employers are tightening their belts.

Britain's economy has yet to be hit significantly, but there are signs that all is not well. In last month's Budget, Alistair Darling cut growth forecasts and sharply increased government borrowing. The UK's gross domestic product is now forecast to grow 1.75%-2.25% this year, compared to 3.1% in 2007.

Prudent employers are looking at their cost base and benefits expenditure is likely to be put under the microscope. There are already signs some organisations are reviewing their spending, in particular, in those sectors hit hard by the credit crunch. Matt Waller, chief executive officer at Benefex, says: "In specific sectors, especially finance and banking, budgets and benefits spend have been frozen in many businesses. In other related sectors, we are seeing a pause in spending, while businesses wait to see if there will be [any] impact from the credit crunch."

The slowdown is also hitting pay with some organisations freezing salaries. Reports earlier this year indicated that Europe-based staff at internet company Yahoo, for example, were told to reduce pay expectations as many would not get a rise.

Martha How, head of reward consulting at Hewitt Associates. "We are seeing much tighter pay bill increases than in 2006 and 2007, and this is likely to continue for the next year."

As the gloom spreads, experts forecast employers may also look to downgrade some benefits altogether. Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), warns executives could be forced to temper their champagne lifestyles. "Some senior-grade perks may be reined back: first-class rail and air travel will be replaced by second-class travel [and] gas-guzzling limos will be swapped for fuel-efficient saloons. Such changes would signal times are tough and leaders are sharing the pain of the rest of the staff. In the longer term, all company cars and travel polices will be reviewed to ensure value for money, as will medical benefits."

Certain benefits, however, will be protected by employment contracts. Tobin Coles, head of flexible benefits at Jelf Group, says: "Employers will look to keep the benefits they are contractually obliged to provide: healthcare, pensions, life insurance and income protection. [Voluntary benefits] will go first [such as] dental and cash plans."

The last global economic slowdown, in 2000 and 2001, saw organisations cutting some benefits and jacking up insurance excesses in a bid to slash costs. However, Coles believes this was a mistake. "In reality, adding huge excesses to policies had adverse risks. For example, with private medical insurance (PMI), there would naturally [have been] a reduction in claims, but untreated conditions only got worse and NHS treatments didn't happen quickly. The long-term repercussions affected organisational ability."

Lisa Page, a senior consultant at Aon Consulting, believes employers should think carefully before making radical changes. "Rather than cutting [perks], employers should seek to manage their benefits plans in a tighter fashion by proactively managing claims and stopping some new initiatives, where the business case does not stack up."

But if employers' benefits budgets do take a tumble, there are still subtle ways to save cash, without scrapping perks. They may wish to consider limiting medical benefits to staff rather than extending cover to their families as well, confining company car lists to fuel-efficient models, or throwing a less glitzy summer party.

Rebrokering benefits, such as PMI, could also enable employers to continue to offer their existing package, but at a reduced price.

In addition, employers could seek to save costs by outsourcing the administration of some perks. "Many employers are looking to streamline their HR departments and outsourcing benefits administration can prove to be very cost-effective while raising standards," says Page.

Another money-saving route to consider is the introduction of salary sacrifice around tax-efficient perks such as childcare vouchers, and pensions. In the case of pensions, it is good practice for employers to pass on their national insurance savings to staff, but some use the savings to fund flexible benefits plans.

If HR departments are to fend off attempts to cut their benefits spend they will need to offer solid evidence of a return on investment, says Cotton. "Show the HR department adds value to a business, and have all crucial HR statistics at your fingertips: size of payroll, what the big items of expenditure are, the cost of staff recruitment, retention and absence [in relation] to levels of employee engagement and performance," he explains.

There could also be challenging times ahead for pensions. The last stock market crash in 2000 put the lid on the coffin for many defined benefit schemes. If the stock market volatility continues and shares take a tumble, deficits could increase.

Pension contributions

For the time being, however, pension investments in thriving corporate bonds are offsetting any falls in the stock market. David Blake, director of the Pensions Institute, says: "Falling equity prices are bound to depress pension values, but if interest rates on corporate bonds rise at the same time, the value of liabilities will fall, so the net effect on deficits is not yet clear."

On the upside, Hymans Robertson's Trends in employee benefits in 2008 survey showed only two-out-of-300 HR professionals predicted occupational pensions would be reduced. Yet Ros Altmann, former pensions adviser to 10 Downing Street, expects financial sector firms to slash employer contributions as their budgets are tightened.

If the UK does end up going into recession,then employee pension contributions are more likely to be under threat. "If [staff] have to choose between keeping up mortgage payments, or making a pension contribution, it is clear that almost everyone would choose to stop paying the pension contribution.

"Similarly, if [they] have big credit card debts, it makes much more sense to pay those off rather than putting money into [a] pension. Therefore, the credit crunch and rising costs of debt servicing are bound to lead to lower pension contributions for many people in future. This will be particularly the case for younger workers," says Altmann.

As employees' debts mount and cheap credit becomes more elusive, it is also a good time for employers to review financial education policies. Staff who borrowed heavily in the good times may find themselves falling behind with their repayments, resulting in stressed and distracted workers.

Claudia Wood, policy and research manager at financial education charity the Resolution Foundation, says: "Dealing with staff under financial stress or in financial crisis is fast becoming a daily reality for employers. If a downturn in the housing market and higher levels of consumer debt fuel economic instability, this is likely to become much more common. Evidence suggests, however, many financial problems can be resolved early on or prevented simply by providing well-timed and straightforward financial advice."

Job security

She recommends offering group seminars on money matters for staff, such as those provided by the Financial Services Authority (FSA), as well as giving staff an hour off each month to help tackle their finances. "Employers should understand that demonstrating a commitment to their staff's financial health can help reduce stress-related illness, improve performance at work and boost morale overall," explains Wood.

With various recent media reports of mass job losses in some parts of the financial services sector, reward professionals may understandably be nervous about their own job security. The consensus within the industry, however, is that HR and benefits jobs are relatively safe. According to the latest CIPD/KPMG quarterly Labour market outlook survey, published in March, 21% of the employers surveyed are planning to recruit HR staff, up from 15% the previous quarter.

Kris Sasitharan, associate director of the HR and secretarial division at recruitment consultancy Joslin Rowe, says: "The war continues, and high-calibre HR professionals are still in huge demand. While some of the financial services firms are understandably more cautious in approving additional headcount, a number of law firms are beefing up their HR departments."

Hewitt Associate's How adds that, even if HR jobs are cut, benefits teams should dodge the axe. "We are seeing some very slight headcount reductions or failure to replace leavers in HR teams but not to a great extent. Generally, reward teams are stable, as it is such a core part of HR activity. Typically training and diversity suffer reductions first."

Whatever happens, organisations should ensure they do not forget employees. A cost-cutting exercise can be morale sapping for the workforce, particularly if it includes redundancies or a squeeze on pay or perks. Communication is the key to restoring flagging motivation, says Cotton. "Think about what and how you communicate. There's probably going to be a lot of bad news and tough decisions to be made, so how are you going to communicate this without destroying engagement and performance? Look at the message and the media, look at line managers' skills and attitudes, and look at unions and staff associations."

This is also the time to emphasise non-financial rewards that help to make a workplace special, such as flexible working arrangements, training, unpaid sabbaticals, and supportive line managers.

"Reward departments need to manage expectations and develop a communication strategy to explain what is being done and why. This way staff morale, productivity and the employer brand are not adversely impacted," says Cotton.

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Slowdown survival tips†

Stick to your guns
You can't scrap contracted perks. Look for ways to subtly scale back others, and consider rebroking insurance perks to deliver savings.

Build a rapport
Keep employees motivated through hard times by communicating what is going on and emphasising non-financial perks such as flexible working arrangements.†

Account for every penny
Ensure you know how much is spent on everything from employee assistance programmes to emergency childcare. Then be ready to prove how these add to an organisation's bottom line.

Learn your subject
Read up on challenges your organisation is facing, so you can come up with solutions. If you do not do so already, keep an eye on the business sections of the national press.

Teach employees a lesson
Help staff to be canny with their cash in lean times by providing information through financial education seminars, websites and leaflets.

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Case study: Mace builds perks despite slowing markets

Construction consultancy Mace is continuing to bolster the benefits that it offers for staff, despite the tightening economic conditions.

So far this year, it has already increased its employer pension contributions by one percentage point, introduced a cycle-to-work scheme and added one extra day of holiday per year for community work.

Kath Knight, group human resources director, says that pay would bear the brunt of any necessary cuts rather than benefits. "There are some indications that things are slowing down slightly, but this has not had a great deal of impact so far. I think the impact would be a slow down in the rate that salaries have been increasing, rather than more drastic measures.

"It would be very short sighted of employers to use a downturn to reduce the benefits that they provide. It takes a lot of effort to engage and motivate employees but it is easy to demotivate," she explains.

The organisation's benefits package also includes two duvet days a year, life insurance, private medical insurance, and unpaid career breaks after three years' service. Last year, the company also added annual medical check-ups for staff.

Knight believes Mace will continue to improve its package. "Over the past two or three years, we have steadily been increasing the range and level of benefits we provide for staff.

"In our annual satisfaction survey, we ask for feedback on many areas including what [staff] think of our benefits, and ask for suggestions for improvements. This way, we can try to tailor our package to reward staff in a way that suits their needs," she says.

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Case study: FirstGroup drives in-house savings plan for staff

Bus and rail operator FirstGroup hopes its financial education scheme will help employees ride out the credit crunch.

The firm encourages its workers to save and borrow through company-sponsored credit unions, which are currently used by a third of its workforce. It also provides financial education seminars and CD-Roms. John Chilman, pensions director, says: "The measures we have in place to support our colleagues in developing their personal financial management skills should stand them in good stead to cope with the emerging situation, including tighter credit conditions."†

He adds that, while the firm offers pay advances in exceptional circumstances, demand for these has all but disappeared. "By taking advantage of our credit union, colleagues build up savings to help them withstand occasional financial crises. They are also able to borrow at reasonable rates and avoid falling prey to doorstep lenders."†

As part of its financial education scheme, the company also sends every employee a copy of the Financial Services Authority's Money made clear booklet.