Employers are so concerned with cutting costs they are setting themselves up for more problems in the long term, claims Watson Wyatt.

The consultancy carried out research on firms in the UK and Middle East and found 43% are planning to reduce UK headcount and 70% will cut budgeted pay increases.

Less than a third of companies are targeting their reward budget on key employees but focusing on high performers rather than those with business-critical skills.

But employers are engaging employees in other ways, such as increased communication around change (75%), better communication on business results (74%), higher visibility of senior managers (45%), more communication on pay and reward (41%) and greater focus on mentoring programmes (35%).

Carole Hathaway, European head of strategic reward consulting at Watson Wyatt, said: "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. Top performers are not necessarily the same as those with business-critical skills.

"Few companies appear to have the reward and performance programmes that enable them to make this important distinction. But failure to reward adequately those with business critical skills - as well as high performers - can have implications on retaining these key workers when the economy recovers."