Employers use cost cutting measures to avoid redundancies

As the recession tightens its grip employers are taking a cold look at reward and considering a number of cost cutting measures to avoid making redundancies says Nicola Sullivan Key areas to consider are: Reduced working hours Paid sabbaticals Pensions Bonuses Contractual perks Consultation process What to consider when making changes to benefits to stave of redundancies Case study: BBC

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Employers faced with restructuring their benefits programme to cut costs and trying to minimise job losses may find solace in the proverb “Necessity is the mother of invention”. As the recession continues to take its toll on many employers, compensation and benefits departments are having to make difficult choices about remuneration, pay and reward,weighing up what changes are needed to ensure their firm not only survives the downturn, but also has the structures and talent in place to remain competitive when the situation improves.

Katharine Turner, principal at Towers Perrin, says: “It is a chance for HR departments to really show their mettle so they can contribute in difficult times and be a true partner to finance,which is calling the shots when it comes to head count reduction. This is a great opportunity for HR to apply a bit of imagination and commercial nous and offer some alternative responses to the crisis.”

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Reduced working hours

While large-scale redundancies may be the only option for some employers, others are looking at various alternatives to avoid a jobs bloodbath. For example, in October last year, staff at construction equipment manufacturer JCB voted to take a £50-a-week pay cut to prevent 350 of their colleagues losing their jobs. As a result, the firm made 150 redundancies instead of 500. But a subsequent round of 398 redundancies, announced in November, showed that such measures might only postpone the need for job cuts.

Similarly, last year, luxury boat builder Fairline Boats introduced a seven-week period of reduced working hours, with staff at four of its production lines working a two day week, while those at another worked a three-day week.

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Paid sabbaticals

Sabbaticals could also be used to stave off redundancies. Earlier this year, accountancy giant KPMG announced it would offer its 11,000 UK staff partially-paid sabbaticals or reduced working hours to avoid job losses in the event its financial position worsened and losses became necessary.

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Pensions

Pensions are another area where employers are looking to make savings. According to the National Association of Pension Funds’ (NAPF) Pension Provision and Economic Crisis survey, conducted with 100 pension schemes between 7 and 13 January this year, more than half of defined benefit (DB) schemes in the private sector are set to close to new joiners.

Marks & Spencer is just one employer planning to alter pension arrangements. In October this year, it intends tomake changes to its final salary plan and early retirement arrangements. It intends to cap annual increases in pensionable pay to 1% for the plan’s 21,000 active members, and those who joined before 1996 also face changes to their early retirement benefits from April 2010.

But these cost-cutting measures are not enough to prevent job losses: the measures were announced in conjunction with 27 store closures and 1,230 redundancies.

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Bonuses

Another popular option is to reduce the costs associated with the bonuses and pay of white-collar workers. For example, UBS introduced a new compensation model for its senior staff after cancelling 2008 bonuses for its group executive board. From 2009, the board, selected senior traders and lead business risk-takers will receive compensation held in reserve, which will be paid only if merited by the firm’s financial results.

Reviewing the bonus and commission arrangements for sales staff could also yield further savings, says Turner. “Is your performance distribution right for the standards you are setting or do you need to recalibrate your incentives?” she says. “Things are going to be tough in 2009, so perhaps you need to be monitoring the pay system accordingly.”

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Contractual perks

But employers must tread carefully when making changes to perks. Paul Griffin, a partner in employment at NortonRose, says: “Even if a bonus scheme is drafted to give the employer discretion as to whether to make an award and the amount of the award, employers will still be required to exercise their discretion fairly.”

If benefits are contractual, employers are required to consult staff about any changes. After the consultation period, employers can either incorporate the feedback from staff representatives, or amend their proposals and implement these to obtain agreement from the workforce. Some employers may ruthlessly press ahead with the changes without agreement, telling staff they can only remain employed on the newterms and conditions, and will therefore be dismissed if they do not accept the changes.

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Consultation process

Pulina Whitaker, partner and head of employment and benefits at Kings and Spalding, says: “It is one thing going through a consultation process but, at the end of that process, quite often an employer is looking to get agreement to the proposed changes.”

She says this can be a risky approach because it can leave employers open to claims of unfair dismissal and breach of contract.

Employers should also be sure not to differentiate between groups of employees when making changes, to avoid leaving themselves open to discrimination claims. An organisation that introduces a four-day week from Monday to Thursday, for example, could be accused of directly discriminating against part-time workers, some of whom may lose a portion of their salary because they had worked on Fridays.When employers defend themselves against claims of direct discrimination (unless it is age-related) they cannot justify their actions by saying any changes were made for a legitimate business reason – which they could do if accused of indirect discrimination.Also, if a group of part-time workers affected by reduced working hours were women with children, claims could be brought under sex discrimination law.

If employers want to change their pension schemes, this is best tackled separately from other proposed cuts as it can be complex.

Robin Simmons, partner at Sacker and Partners, says: “Some pension schemes’ rules prevent closure to existing staff, so employers should check first whether this can be achieved. If it can, they need to consult affected staff for at least 60 days and give proper consideration to their views.” Employers also need to be aware of the difference between accrued and future pension rights because statutory restrictions mean it is difficult to make changes to accrued benefits unless members agree. It is possible to make changes to future pension rights, but employers making actuarial changes to DB schemes must get trustees’ permission. However, as long as any changes to perks are handled correctly, employers will find they have a number of options to try as an alternative to redundancies

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What to consider when making changes to benefits to stave off redundancies

• Employers must consider what changes are needed to ensure they survive the recession, while also having the structures and talent in place to remain competitive when it is over.
• Possible cost-cutting alternatives to redundancies include reduced working hours, sabbaticals, and reduced or postponed bonus payments.
• Companies that make changes that are not common to the entire workforce could leave themselves open to legal action under discrimination legislation.
• Pensions are one of the most difficult benefits to change and employers must consider statutory restrictions that mean it is difficult to make changes without members’ consent.
• It is important for employers to obtain buy-in from employees for any changes to perks. This is normally done through a consultation with staff representatives or trade unions.

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Case study: BBC

The BBC has removed pay rises and bonuses for senior managers until after 2010 in a cost-cutting exercise partly triggered by the recession. At the end of January, BBC director general Mark Thompson sent an email to staff outlining plans to cut bonuses and freeze wage increases as part of a move to save an estimated £20m over 18 months. Other steps include axing bonuses for some lower-grade staff in BBC Resources and the public services businesses until after 2010. Salaries in the commercial businesses will also be frozen until after June 2010, although staff in BBC Worldwide and BBC World News will continue to be eligible for annual bonuses in line with existing contractual commitments.