Limited pay budgets not used effectively

European companies are currently so focused on cutting costs through lay offs, salary and hiring freezes, that they may be setting themselves up for problems in the medium term, according to recent research by Watson Wyatt.

A survey of 200 companies from across Europe and the Middle East found that 43 per cent (52 per cent of UK companies) have taken action to reduce permanent workers. Most have also sought to hold down pay, with more than 70 per cent looking to reduce their budgeted pay increases in response to the current economic climate.

“These are clearly sensible measures in these uncertain times, but our concern is around how companies appear to be using their limited pay budgets,” said Carole Hathaway, European head of strategic reward con sulting at Watson Wyatt.

Less than a third of companies are targeting their reward budget on key employees. Moreover, where this is happening, the focus appears to target only high performers rather than those with business-critical skills.

“Despite a majority of companies claiming to have a greater focus on their key talent, few are supporting this by actually targeting their reward spend on them,” said Hathaway. “Top performers are not necessarily the same as those with business-critical skills. Few companies appear to have the reward and performance programs that enable them to make this important distinction.”