The Salary Sage

Cutting Salaries, Bonuses, and Benefits

I was recently interviewed by a reporter for the Thomson Reuters' HR Wire (Paula Santonocito) who was researching trends in compensation; particularly those relating to companies reducing pay as a response to challenging economic times. Below are some excepts from her recently published article.

ANALYSIS & PERSPECTIVE

Implementing staff cuts is only one measure companies have taken to reduce costs. Organizations are also cutting salaries, bonuses, and benefits.

A GROWING TREND

In recent weeks, the practice has become more common. Generally, others get wind of these kinds of reductions in connection with layoff announcements. A company will release information about job cuts and provide specifics about other cost-cutting measures.

For example, when department store chain Macy's said it will slash 7,000 jobs, the retailer also announced it is eliminating executive salary increases for 2009, reducing the amount of its 401(k) contribution, and cutting its dividend.

Similarly, when announcing it would cut 1,100 jobs, upscale retailer Saks said it would suspend matching 401(k) contribution and freeze salaries.
And the practice isn't confined to the retail sector.

When announcing it will eliminate 10,000 salaried jobs worldwide, General Motors, the largest U.S. automaker, said it will reduce executive pay by 10 percent, and reduce other salaried employees' earnings between 3 and 7 percent.

Likewise, in connection with announcing it will cut 450 jobs, UK-based luxury automotive maker Jaguar Land Rover, a subsidiary of Tata Motors of India, announced that management bonuses have been eliminated and management salary increases have been deferred.

These are only a few companies that have made headlines for their cost-cutting initiatives.

Perhaps the most noteworthy example, and the one to get the most media attention, relates to bonuses. There has been much debate about whether executives at companies that take federal bailout money should receive bonuses. The argument for bonuses is that they are part of a salary package; the argument against is that these times require sacrifice.

SHARING THE PAIN

Wherever an organization chooses to cut, there should be consistency. So says Kent Romanoff, compensation consultant and founder of IncentivePlanBuilder.com, an online incentive plan design tool.

Romanoff tells HRWire the objective is to create a cost-cutting initiative, but it is also to build a lifeboat, and the message should be "we're all in this together."

However, he acknowledges there are challenges. "The term 'fair' is very much in the eye of the beholder," Romanoff says.

Just as there are different ways to increase pay, there are different ways to reduce pay, he explains. Flat dollar increases or decreases are one way.

Yet, yearly increases are typically tied to percentages of base pay. This method tends to be unfair to someone at the lower end of the scale, Romanoff says. Likewise, when you go to the other side of the equation, the salary reduction mode, you run into the same issue, he says.

Although some argue that the percentage should be the same for everybody, Romanoff disagrees. "I advocate against mindless percentage increases on the way up or down," he says. "I do believe it is mindful for executives to take a bigger hit."

Romanoff sees an "incredibly unbalanced relationship" between what executives are paid and what they actually earn. He tells HRWire we have this inequity built into the U.S. compensation arena, and there is a need to level the playing field.

Click here to view the entire article.

ABOUT THE AUTHOR

Paula Santonocito is a business journalist specializing in employment issues. She is the author of nearly 1,000 articles on a wide range of topics, such as impact of world events on the workforce, recruitment and hiring, retention, HR legal issues, benefits, diversity, changing workforce demographics, and the Internet as it relates to the workplace. Articles by Paula Santonocito have been featured in many global and domestic publications and information outlets, including Thomson Reuters’HRWire; The Wall Street Journal site CareerJournal.com; Expatica HR; AIRS News; Monster.com Office HQ; Online Recruitment Magazine; and others. In addition, her work has been posted at more than 100 web sites throughout the world, referenced in academic and legal publications, and translated into several languages. Paula Santonocitoserves as AIRS News editor, features editor of Online Recruitment Magazine (North American edition), and career editor of SingleMindedWomen.com.

Car Allowances in the Age of Skyrocketing Fuel Costs

With fuel costs skyrocketing in the wake of unprecedented worldwide demand for oil, the cost of operating a vehicle has been steadily increasing for the last several years. In response, the IRS has increased vehicle reimbursement levels twice this year – once from 48.5 cents to 50.5 cents effective January 1 and again to 58.5 cents effective July 1. In addition, companies are reassessing their vehicle reimbursement policies to determine the extent to which they cover actual operating costs. I recently conducted a study that approached vehicle allowance from two distinctly different vantage points:

1.       Various statistical sources were consulted to determine the actual cost of operating a vehicle in today’s dollars. 

2.       An informal survey was conducted involving several large employers to determine how these companies are responding to the fuel crisis and the level of reimbursement they are currently offering to executives and other employees to offset these costs

The survey included eight California-based companies from a variety of industries (including healthcare, electronics, financial services, manufacturing, and consumer products) and one company headquartered outside of California.

DATA SOURCES

The following data sources were used to determine the current cost of vehicle operation:

Vehicle Operating Costs -- Based on AAA 2008 Edition of "Your Driving Costs"

Current Fuel Costs-- Energy Information Administration (EIA) of the US Department of Energy (DOE) Statistics for the week of 6/30/08.

IRS Standard Reimbursement – Internal Revenue Service US Department of the Treasury.

VEHICLE OPERATING COST ANALYSIS

The table on the following page summarizes total current vehicle operating costs. The analysis is presented both in terms of total cost as well as cents per mile at three different annual mileage levels (10,000/15,000/20,000) and four different vehicle sizes.

All data are based on national averages with the exception of fuel costs which are based on the average for the San Francisco/Bay Area as of June 30, 2008. Vehicle operating costs take into consideration all associated expenses including:

●        Fuel

●        Tires

●        Maintenance

●        Full Coverage Insurance

●        License

●        Registration

●        Inspection

●        Taxes

●        Depreciation

●        Finance Charges

Click here to view a summary of the results --> Download vehicle_cost_summary.pdf 

COMPANY VEHICLE ALLOWANCE POLICIES AND PRACTICES

Below is a summary of the vehicle reimbursement practices of the nine companies that participated in the survey. The names of the companies have been omitted to protect confidentiality.

Eligibility

Eight out of the nine companies surveyed provide all executives with a company car or some form of car (or perquisite) allowance.

Company Cars

Three of the participants provide leased cars to executives. Two of the three allow executives to select their own vehicle up to a maximum Manufacturers Suggested Retail Price (MSRP). One of the participants limits the selection to three specific vehicle makes and models. Those organizations that provide company cars also cover all maintenance, upkeep and repairs. In addition, it is customary to provide executives with a either company credit card for fuel or reimburse for fuel at the standard rate of 58.5 cents per mile.

Vehicle Allowances 

Vehicle allowances range from $400 to $1,000 per month.

Perquisite Allowance

One participant provides executives with a “perquisite allowance” of up to $15,000 (based on job level). The recipient is free to use the allowance in any way s/he sees fit (i.e., vehicle, club membership, financial counseling, etc.) though most use it to pay for a car.

Mileage Reimbursement

Six of nine participants reimburse executives for business use of their vehicle at the standard IRS allowed rate of 58.5 cents per mile. This applies both to company cars and business use of personal vehicles (but does not apply in situations where a gas card has been provided). All companies surveyed reimburse for business-related tolls and parking.

One participant varies mileage reimbursement based on the size of the monthly car allowance -- The higher the allowance, the lower the mileage reimbursement. This is due to the fact that the standard IRS allowance of 58.5 cents per mile is intended to cover more than merely fuel and it is viewed that non-fuel-related expenses are offset by the monthly allowance.

Other Considerations 

One participant reduces the amount of covered gas expenses for executives whose vehicle fails to meet minimum miles per gallon (MPG) standards set by the company.

One participant has recently phased out all executive vehicle allowances entirely, stating that executives use their vehicles almost exclusively for commuting to and from work making vehicle allowances an unnecessary expense.

FINDINGS & OBSERVATIONS

Below are the major finding and observations resulting from the study:

1.       The total annual cost of operating a vehicle ranges from approximately $6,000 to $13,000 per year depending on the size of the vehicle and amount it is driven 

2.       Vehicle allowances range from $400 to $1,000 per month.

3.       For all but the smallest cars, driven fewer than 10,000 miles per year, the standard IRS allowance for mileage reimbursement does not cover the total cost of operating a vehicle, although it is more than adequate to offsite the costs associated with occasional business travel.

4.       There is little consistency or agreement in the way companies approach compensating executives for operating a vehicle.

5.       The vast majority of executives use their vehicles for little more that commuting to and from work. As such, the decision to provide them with a company car or a vehicle allowance is really more of a perquisite than a necessity.

6.       Because of the amount of business miles actually driven by typical executives, the value of the benefit they receive is often perceived more as a supplement to their ordinary cash compensation than as an offset of actual expenses incurred.

7.       Since companies exhibit such a wide range of vehicle reimbursement policies and practices, and since the actual cost of operating a vehicle depends almost entirely on how much that vehicle is used for business purposes, each company must arrive at its own philosophy and approach for compensating executives and cannot rely on common practice.

ADDITIONAL INFORMATION

Feel free to contact me for more information on the results of this study.