As recession gives way to recovery, the economy is forcing organizations to closely re-examine compensation practices and make some difficult decisions—some of which might prove to be game-changers, reshaping compensation strategy in the years ahead. Here are some of the top questions that employers are asking as they set their compensation agendas for 2010, with responses provided by a global trio of Mercer compensation consultants.
Question: How should employers that froze salaries but still made promotions during the past year handle employees who are well behind their desired market pay position?
Response from Shinny Feng, principal in Mercer’s Shanghai office: This is the most frequent question we’ve received over the last few months, and it’s no wonder. Our research shows that only 28 percent of companies around the world made salary increases as planned enterprisewide in 2009. That means three in four companies froze salaries at 2008 pay levels, made pay increases for just certain employee groups, deferred pay increases, or decreased salaries from 2008 levels.
When a company is in a position to start making base salary increases enterprisewide, or to certain employee groups, here are some key things to take into account:
1. Consider which actions set in place over the last 12 months are “game changers;” few people anticipate we will go back to business as usual. This may mean truly embracing a pay-for-performance culture, or that base pay increases occur every two to three years as responsibilities change, not annually.
2. Determine if the affected business unit, job function or geography is leading value creation and deemed a “performance driver” in the organization. If so, consider differentiating that group by making base pay market-competitive right away; organizations can’t afford to lose their high potentials. If employees are not part of the “performance drivers” workforce segment, then perhaps move them to market-competitive over time.
Question: Given that many annual incentive programs won't be providing payouts to employees at the end of 2009, what should employers do?
Response from Iain Morris, principal in Mercer’s Toronto office: This is an important challenge that many organizations must address. The answer depends on why the incentive plans are not paying out. Ask a couple of questions:
1. Is this situation predominantly a result of the economic situation? If so, then it may be best to “stay the course”—incentives are supposed to vary with business performance.
2. Has the company's business changed fundamentally? If so, it’s likely that some performance measures are not aligned with the company’s new business strategy and the annual incentive plan design should be reviewed.
A number of organizations are redefining the “right” results on which to pay incentives and are introducing new incentive program measures that recognize the difficult forecasting environment. In some cases this has been as simple as adding a greater degree of discretion into the plan and moving away from a purely formulaic approach. Other organizations have added operational metrics to their plans, placing the focus on performance that is clearly within management’s control.
Question: In what ways can organizations incentivize and engage their high-potential employees without cash?
Response from Loree Griffith, principal in Mercer’s New York office: There is always a market for high potentials. In fact, in a recent study we found that 37 percent of organizations globally say they will continue to hire key talent even as they reduce their workforce overall. Creative ways to engage high potentials without significant cash outlays include:
1. Enable “career pathing” by showing possible directions for advancement. Providing clarity to high potentials around career choices they can make within the organization, the skills they'll need to develop and their future responsibilities can help them focus on their performance and stay engaged.
2. Develop and implement an employee communication plan to minimize distractions and increase productivity. The most effective communication campaigns reinforce the employee value proposition, involve all levels of leadership and employ various mediums, from in-person meetings to online click books or blogs.
3. Tune up the performance management process. Effective performance management enables an organization to differentiate among performers in a fair and transparent way.
Question: How can an organization interpret market compensation data and use it responsibly?
Response from Shinny Feng: There is a real challenge to using market data responsibly because of the prevalence of salary freezes and the fact that the economy affects geographies and industries differently. Yet there is a need for just-in-time information, given employers’ desire not to fall too far behind and risk losing their best talent.
During times of market unrest, internal affordability might take precedence over market competitiveness. As a result, companies should fine-tune their pay-for-performance programs and make informed pay decisions based on quantitative analysis of data collected by their HR information systems as well as from payroll, finance, operations and customer data sources.
However, it’s important to understand the market data used in the analysis. As a general guideline, if the aim is to measure against the overall labor market, then use the aggregate; if you are concerned about a specific peer group, then use the actual average increase of that group. Be aware of how the survey samples might differ from prior years, and know if zeros are included in the average—that is, data from companies that froze salaries.
Shinny Feng, principal in Mercer’s Shanghai office, Iain Morris, principal in Mercer’s Toronto office and Loree Griffith, principal in Mercer’s New York office, join other consultants in answering questions on compensation planning at Mercer’s Human Capital 2010 interactive magazine.
U.S. Salary Increase Budgets Up Just 3% for 2010, SHRM Online Compensation Discipline, September 2009
2010 Salary Increase Budgets Projected to Rise Worldwide, SHRM Online Compensation Discipline, September 2009
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data Center