With America's business climate gradually improving, companies are able to focus less on cost-cutting measures and are beginning to turn back toward attracting and retaining top performers and critical-skill workers.

Watson Wyatt's 2003/2004 Survey of Strategic Rewards and Pay Practices found that only 18 percent of respondents expect to require employees to pay a greater share of benefit costs next year, compared to more than half (56 percent) that did so over the past 12 months.

The survey also found that other cost-management measures implemented by companies during the past two years — such as reducing salary increase budgets, bonus funding or staff — are also expected to decline sharply in the coming year.

Past and Future Cost-cutting Activities
Cost-cutting Activity	Past Year	Next Year
Require employees to pay greater share of benefit costs	56%	18%
Reduce salary increase budgets	45%	12%
Eliminate/severely cut bonuses	16%	5%
Divest unprofitable units	15%	5%
Reduce employee benefits	12%	6%

"The difficult business environment and cost-cutting of the past several years have caused many companies to change their reward practices, especially the mix of rewards," said Laura Sejen, Watson Wyatt's national practice director for strategic rewards. "While fewer companies see the need for additional cost-cutting in the coming year, clearly the nature of the employer-employee deal has shifted."

For example, in light of pending changes in accounting for stock options, more than four out of ten (41 percent) companies have decreased eligibility for participation in long-term incentives. According to Sejen, this weakens the link between employees' rewards and the long-term financial performance of their companies. It also reduces the opportunity for wealth accumulation, previously an important component of the employment deal in many companies. The survey also noted that 39 percent of companies are making changes to their short-term and annual incentives.

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