Managing Business in a Downturn: Reducing People Costs

Companies engaged in different industries in Russia have been experiencing the impact of the crisis in different ways. While some continue to enjoy continuous revenue growth and are considering how much to increase employee pay in 2009, for the majority of companies, the current economic downturn is driving the need to reduce spending to balance decreasing income. People costs are usually amongst the first to be cut.

When cutting HR-related costs, it is important to keep in mind that bright, motivated and competent employees provide a critical competitive advantage. They will help businesses to not only enjoy growth in the future, but also to survive the current harsh economic conditions. Efficient optimization of these costs requires a well-balanced approach that is consistent with a company's reward strategy as well as its HR strategy as a whole.

Every organization is unique. Each company will therefore need to take a unique approach when revising employee compensation structures, so they are fit for current market challenges. At the same time, most organizations can learn and benefit from others' experiences, for example by monitoring market trends.

We carried out research in March 2009 among 129 leading Russian and international companies operating in various sectors in Russia.

The research highlighted that, amongst other things, businesses take a consistent approach towards salary review across all employee levels. One quarter of participating companies are planning to increase base salaries this year, and will increase salaries at all levels from top management to administrative staff. Further, the planned increase is the same 10 percent average for all levels.

Only 6 participants of the survey are planning to reduce salaries. The amount of these salary reductions do not vary not dramatically, ranging from 18 percent for top-management positions to 15 percent for professional staff positions.

Around one quarter of companies decided not to make any changes to the base pay for any employees and the other half of the companies had not decided on salary changes for 2009 at the time of research.

The limited number of the companies that have decided to reduce salaries can probably be partially explained by the fact that most companies in our survey express salaries in rubles. As inflation is relatively high in Russia, and there has also been the negative effect of ruble devaluation, in practice a salary freeze means a salary reduction in terms of its purchasing capacity. Despite some pressure from employees, participants in the survey do not plan to change the currency in which pay is determined in the foreseeable future. At the same time some companies are using enforced unpaid leave or shortened working hours to reduce their payroll costs.

Bonuses are another significant cost with the potential for companies to make savings. According to the survey 20 companies are currently deferring short term variable payments due for 2008 until their financial position is clearer, some have decided to cancel 2008 bonuses, regardless of the level of results achievement and are also considering changes in short term variable pay in 2009. Modification of key performance indicators and scales of payments are common. Slightly less than half of the companies consider that payments may not be made for 2009 due to non-achievement of targets.

Currently one-third of companies use long-term incentive plans. According to our research, the most popular plans are stock options and phantom options. Interestingly, 10 companies said they have plans to introduce new long-term incentive plans.

In terms of benefits, most companies are planning to preserve medical insurance for employees. Currently, almost all survey participants provide this. However, small cost-saving adjustments are being made by some companies, including change of benefit provider and reduction of the scope of service available under the insurance policy.

Another common benefit, corporate mobile phones, which are provided by most participating companies, will be subject to changes by a larger number of companies. These changes include the reduction of call allowance limits, and limiting the number of employees eligible for the benefit.

In relation to expatriate employees, around 85 percent of companies with such staff are not planning any changes, and 10 percent of companies are planning repatriation or localization of some of their expats.

Although salary reductions and non-payment of bonuses did not appeared to be common measures, for companies which are considering these as methods of reducing HR-related costs, it is important to bear in mind certain restrictions imposed by labor legislation and other applicable Russian laws.

For instance, the salary amount, as one of the provisions of the labor contract, can generally be amended by mutual agreement of the employer and employee. In certain cases, the employer may amend the terms of the labor contract unilaterally. However, in the latter case it requires compliance with complex procedures.

In conclusion, companies are using a range of methods to adjust their remuneration systems, including salary freezes and changes to bonus plans. Furthermore, it is possible that the Russian government may follow those in other countries by imposing restrictions on the amount of senior executive pay in some companies, particularly those that are publicly-owned.