Mitchell Langbert

The 2009 Compensation Rollercoaster

What will 2010 bring?

December 17, 2009
by Mitchell Langbert, PhD

Recession, deflation and inflation together with historic Presidential and Congressional regime change switched on a compensation and benefits roller coaster ride this year that makes Coney Island’s Cyclone look tame.  New regulations were passed; raises were frozen and unfrozen; the automobile industry faced dramatic pay cuts and layoffs; the largest government intervention in American business history (of the banking industry) has fueled public criticism of Wall Street; an ongoing executive compensation drama continues to arouse public concern; and recent graduates have seen stagnant wages. If that’s not enough, the largest healthcare reform proposal since 1994 is under debate. If a psychic had predicted any of this in mid-2008 no one would have believed him. But then again, no one would have believed the collapse in stock prices last year either.

New Regulation

In January, the brand new Democratic-controlled Congress pushed through the Lilly Ledbetter Fair Pay Act, which amended the Civil Rights Act so that the 180-day statute of limitations for filing an equal-pay lawsuit regarding pay discrimination resets with each paycheck. On July 24, the last of three increases in the minimum wage under the Fair Labor Standards Act (FLSA) that were first passed in 2007 went into effect, with the minimum wage increasing to $7.25. Pundits were expecting Congress to pass additional legislation that has yet to materialize, such as the organized labor-supported unionization card-check bill. President Obama has not moved as quickly on this idea as labor leaders had hoped and some tension may be accruing in the labor-Obama relationship as a result.

Layoffs, Wage Cuts and Freezes, Oh My

Organized labor and the political left have been frustrated because of wage cuts imposed on auto workers at Chrysler and General Motors at the Obama administration’s insistence.  In November 2008 Bloomberg had reported that the United Auto Workers Union had agreed to cut new worker pay in half and terminate their defined benefit pensions, but was resisting additional cuts. In February 2009, General Motors announced a 14 percent  white collar headcount reduction, reducing the number of its white collar jobs to 63,000, with about 12 percent of its 29,500 US salaried jobs being eliminated. Thus, rank-and-file UAW employees at Evansville, IN-based Pittsburgh Glass Works, which makes auto glass, who were working at a plant running at 15 percent of capacity, accepted significant wage cuts, according to Indiana Economic Digest.

Some federal government employees suffered as well. The federal government froze locality pay. Locality pay is pay over the base federal rate in geographic regions with high living costs. In August, President Obama wrote to Speaker Pelosi that he would reduce pay increases of federal workers to 2.0 percent from 2.4 percent because of the federal budget deficit.

But during the year the wage cyclical began to shift. In July, the Society for Human Resource Management's (SHRM’s) website ran an article about lifting pay freezes, noting the problem of staggered salaries for pay equity. In early October, SHRM noted that employers were preparing to award merit increases of approximately three percent. Also in October, the Watson Wyatt (PDF) consultancy announced that half of respondents to a survey planned to reduce hiring freezes by next April; employers were increasingly reversing reductions to 401(K) matches; and almost all companies were making offers to applicants. About half of large U.S. companies that froze salaries in 2009 were planning to end the freeze.

Executive Pay

There have been executive pay cuts, but criticism of executive pay continues. At Ford, in February 2009 Bill Ford and CEO Alan Mulally cut their salaries by 30 percent. General Motors (GM) had similar cuts. But this was insufficient for GM. In October, Elizabeth Warren, chair of the Troubled Asset Relief Program (TARP) bailout fund, announced on National Public Radio reported that executives of firms that took government money would have to cut their total pay in half and reduce base compensation by 90 percent.

Cuts were not limited to firms on the government dole or in beleaguered industries. Hewlett Packard’s Mark Hurd cut his pay by 20 percent because first quarter profits had fallen by 13 percent.

Not surprisingly, firms like General Motors have begun to have trouble recruiting senior executives because of the steep cuts. At GM, pay for its chief financial officer was capped at $500,000 and the firm has been having trouble recruiting a new CFO, according to USA Today.

Writing in Forbes, the University of Chicago Law School’s Richard A. Epstein complained that Ben Bernanke at the Federal Reserve Bank has been pushing Wall Street to better align incentives with employee performance and that the Fed lacks the know-how to manage pay. But a study at Harvard Law School found that Bear Stearns's CEO James Cayne and Lehman's CEO Richard Fuld were paid $388 million and $541 million in 2008 despite the collapse of their firms. Between 2000 and 2008 Bear Stearns executives were paid $1.4 billion in bonuses.
Recent Graduates

Many recent graduates may hope to duplicate Fuld’s and Cayne’s paycheck performance (hopefully not their ethical performance). They are likely to be disappointed, but things are not so bleak for recent grads. In July, the SHRM reported that starting salaries for college grads was $49,307, not even 1 percent less than the $49,693 for 2008. If you factor in a bit of deflation (according to the Bureau of Labor Statistics deflation from October 2008 to October 2009 was about 0.2%) recent grads did about $100 worse than that.

In May, the National Association of Colleges and Employers (NACE) noted that only 19.7 percent of college graduates who had applied for a job had one, but the percentage was higher for those who used career center services. In November, NACE found that further declines in campus recruiting were likely to occur. If a grad found a job the pay wasn’t bad, but finding a job was tough.

The picture looked better for accounting grads. NACE found that accounting salaries for recent grads were the most competitive this year, beating out engineering and education. In its 2009 report the AICPA found that hiring of accountants had fallen off, especially among smaller firms with below 50 CPAs. The AICPA expected that firms were "very conservative in projecting hiring for the 2008 – 2009 cycle.” But salaries for entry level public accounting firm accountants averaged $51,500 last year and a staff accountant with one to four years’ experience earned $43,700 to $58,000.

Health Costs and Healthcare Reform

In January, Towers Perrin found that “high-performing” companies that use “account-based” health plans saw their healthcare costs go down by 12 percent. Overall, though, healthcare costs increased six percent from 2008. Thus, the cost-per-employee per year for high-performing companies was $8,904 while it was $10,104 for low-performing companies, a difference of $1,200 or 13.5 percent of the $8,904.

Another survey, released by Aon Consulting and the International Society of Certified Employee Benefit Specialists, found that 44 percent of survey participants offer the high-performing consumer-driven health plans (CDHPs) up from 28 percent in 2006. Of those, 56 percent use a health savings account (HSA) model, while 35 percent of organizations use a Health Reimbursement Arrangements (HRA) model, which depends on employer contributions. Nine percent use both. HSAs are less costly to employers (but more costly to employees) and have grown in popularity.

With respect to the most dramatic issue of all, healthcare reform, the Kaiser Family Foundation reports that the House and Senate HR 3590 bills (the House version passed in November) require most individuals whose incomes are above the poverty line to obtain health insurance. The Senate bill assesses employers with above 50 employees in which an employee receives a healthcare premium credit a $750 fee. The House bill would tax employers with payrolls over $500,000 who do not offer health insurance a graduated tax reaching six percent payroll tax at $750,000. Both bills would expand Medicaid to all those just above the poverty line. There are tax credits for small firms and low-wage workers. Naturally, health insurance will raise labor costs for small employers and may contribute to systemic unemployment. Unemployment is currently about 10 percent, but who’s counting?


There is considerable pressure for health reform. In July, Wal-Mart announced its support for health reform, presumably because (a) doing so helped Wal-Mart’s public image; (b) Wal-Mart sees a federal mandate on small business as potentially contributing to its own competitiveness because of higher costs to the competition; and (c) Wal-Mart may project lower healthcare costs because of more universal coverage. In September, President Obama pitched reform. Both houses of Congress are predominantly Democratic.

Although the public is divided, passage seems likely.

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Mitchell Langbert, PhD, is an Associate Professor, Brooklyn College. Widely published on the subject of human resource management, Langbert has consulted and served as an expert witness.