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Compensation management in the economic downturn 05/10/2009

In lean periods, businesses need to focus on areas that directly impact the bottom line and in this respect reward has one of the most profound impacts of all

Compensation management in the economic downturn

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  1. Assessing the opportunity
  2. Meeting the Challenge
  3. Flexibility and control
  4. Improving compensation alignment
  5. Involving managers
  6. Why compensation matters
  7. Useful links
  8. Recommended reading

Assessing the opportunity

Some human resources (HR) professionals may be tempted to use the current economic climate as an excuse to make compensation management a low priority, reasoning that there is little point in making pay adjustments when they have no budget for raises or bonuses.

The reality is that lean periods cry out for optimised efficiency. In difficult times, businesses need to focus on areas that impact the bottom line. Compensation fits the bill in this respect and offers organisations the opportunity to improve their levels of staff motivation, productivity and retention.

A key part of any successful compensation strategy, performance-based pay, links the employee’s reward to their performance and contribution to the company’s success, motivates employees and encourages learning, innovation, creativity, problem-solving and empowerment.

Executing this strategy successfully relies on HR departments merging periodic performance reviews with the compensation process. Streamlined efficient automated systems are now available that allow organisations to transfer ratings achieved in these reviews to compensation recommendations as part of overall performance workflows based industry best practices. Businesses should ensure that their chosen system supports calibration (adjusting the performance measurement to match a known standard), a wider rating scale, and/or comparative rating.

By integrating compensation with performance management processes in this way, they can help to make certain that employee increases are fair, equitable and merit-based.

Meeting the Challenge

Today, however, the reality often falls short of this ideal. Typical limitations include lack of automation, poor appraisal controls and reliance on basic spreadsheets.

Lack of automation typically Results in too great a reliance on manual intervention, which is time-consuming and costly, introduces risks in terms of accuracy and security and leads to an inability to easily match performance with compensation. Poor appraisal controls will often result in inconsistencies in compensation due primarily to over-reliance on the subjective views of individual managers.

Multiple spreadsheets typically result in more effort and confusion for compensation decision-makers. Over a decade of research has consistently proven that spreadsheets are full of errors. The evidence suggests that individuals are typically only 95% to 98% accurate when they create formulae in spreadsheets. And a 2006 study by Bloor Research found that over 90% of spreadsheets contained errors.

Most businesses cannot afford that level of inaccuracy. If you are still relying on spreadsheets, your organisation should strongly consider implementing a compensation management system that uses automation to mitigate the risk for manipulation and errors, enforces specific guidelines and standards and adheres to industry standard processes.

Flexibility and control

With the right set-up of business rules, performance, salary and variable compensation, data can be manipulated in real-time by managers within a single system, using budget enforcement rules to ensure that the compensation provided matches with pre-defined guidelines. Access to the system will of course, also be subject to different permission levels being put in place in order to maintain the strictest possible levels of data privacy.

The great advantage of such an approach is that it provides a combination of flexibility and control. It streamlines the whole process of making modifications and adjustments to the system, while at the same time ensuring that every change can be tracked, audited and validated.

So, having an efficient automated infrastructure in place is critical. But once this has been implemented how can organisations build on it and look to improve their compensation practices? Here we consider some key steps they can take to achieve their goals.

Improving compensation alignment

No compensation system is complete without sound performance management data. Calculating the effect of an employee performance management system is not always so cut-and-dried. If a business is concerned about how its current performance management processes affect compensation, it must leverage compensation surveys and map them to the positions the company currently employs. If this reveals that the organisation is drastically overpaying its workforce, an employee performance management system can help close the gap.

Most organisations claim to pay at market rates and some purposely pay a premium. Almost all companies leave some money on the table for negotiations. Compensation specialists often rely on market data and subjective appraisal ratings to determine salary adjustments.

The execution of this approach is often flawed not least because many performance reviews aren’t objective and consistent among groups. As the cycle repeats itself, compensation becomes increasingly poorly aligned, ultimately affecting the bottom line.

Involving managers

Of course, it must always be recognised that money is not the only motivator for engaging and retaining a workforce. Particularly in the current economic climate, employees may be more worried this year about job security than their annual increase. In this context, managers helping their staff to spend extra time on talent assessments or encouraging them to look for development opportunities, such as training or an increase in work responsibilities, is not time wasted. These alternatives reflect the company’s faith in key employees while defining clear conduits for career growth.

HR departments should not be conducting compensation budget allocations alone and behind closed doors. They may still wish to oversee the process to ensure consistency and control costs but if organisations hope to improve the ongoing cycle of talent development, they must be certain that managers participate in this critical process.

They need to have at their disposal the necessary tools to make smart, effective decisions, including performance and goal data, salary bands, previously allocated budget information, increase guidelines, and so on.

Why compensation matters

As this article has highlighted, having an effective compensation strategy can help an organisation survive and thrive in the current economic environment.

By integrating compensation with performance management processes, organisations can ensure that employee increases are fair and equitable, while at the same time helping limit or reduce an organisation’s overall salary growth. As a result, businesses can accurately identify and reward top performers, while fairly distributing consistent salary adjustments based on merit.

In the current economic downturn, adopting a pay-for-performance culture is playing a particularly crucial role in helping to retain staff and increase productivity. The most effective way to guarantee the integrity of a compensation plan is to link it to an employee performance management system, which will provide the tools required to manage, monitor and measure employee performance accurately at every step in the process.

So, while cutting back on HR efforts may seem an attractive option, businesses need to remember that the current economic climate is actually a call for greater diligence, particularly with regard to large budget items like compensation. Now is the time to optimise processes to ensure the most efficient use of corporate resources and to help engage, retain and develop, the company’s most valuable asset – its workforce.

Useful links

Richard Oyen, director of HR and Talent Development, SumTotal Systems

Richard Oyen, director of HR and Talent Development, SumTotal Systems