Career advice, insights & tips for HR professionals
The time is now to review your reward strategies 05/10/2009
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Up until now, rapid cost cutting initiatives, driven by the recession has left little time for organisations to review their reward strategy. We discuss why the time for action is now, in this era of low inflation and recommend how to do this effectively
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- The situation on pay
- A range of solutions to save jobs and cut costs
- A fresh look at remuneration
- Root and branch review
- Inflation forecasted to rise
The situation on pay
All around the world, inflation is falling. Our study of more than 2,000 companies in 88 countries globally shows that pay increases this year have fallen from 4% to 2.8% just four months since our last survey. Indeed, many organisations will be freezing salaries and may even be cutting pay. This is a period when relative deflation combines with a global recession.
For organisations facing pay reviews, the question is less: “what is my competitive position?” or “what are inflation rates?” and more “what, if anything, can we afford?” Given the speed at which the recession has taken hold, companies have been forced to take rapid action to cut costs.
A range of solutions to save jobs and cut costs
Our latest Hay Group survey,‘Reward in a downturn’, shows that not only is a huge amount of organisational restructuring going on, but also that employers are resorting to a range of solutions: recruitment freezes, much reduced pay increases, pay freezes and even pay cuts in some cases.
Some employers have introduced imaginative solutions to save jobs – reducing costs through flexible working arrangements, reducing working weeks, delaying start dates and so on. All are designed to cut costs while holding on to the employees that will be needed when the recovery comes. To ensure that remuneration policies contribute to business strategy, companies must assess:
- target levels of profitability and performance, and the resulting level of affordable compensation
- which components of the remuneration system help the business most to achieve business strategy and performance goals, retaining and motivating talent
- how to reduce the fixed elements of remuneration costs and build more performance related ‘automatic stabilisers’ or safety nets into the remuneration system
- whether any increases need to be made at the present time, or if the ‘reward pot’ could be distributed more effectively
- what components of remuneration employees really value and how the biggest return on investment can be achieved from the pay bill
- how can the organisation ‘put its mouth where its money is’and improve the communication of the value and rationale of the compensation programme
- what structure of employment the company wants - between full-time, part-time, contract and other approaches
- how can remuneration policies be supplemented with other aspects of non-financial rewards. These could include training, motivational management and workplace environment. Consider how to create a more compelling total reward offer that captures the hearts and minds of employees.
As yet, few companies have targeted pension schemes and other Benefits, not least because of the time it takes to make changes. However, they have started to review both short term and long term incentive schemes to refocus employees on achievable performance targets.
A fresh look at remuneration
Performance management processes and decisions have become sloppy. Bonus schemes have not always been fully aligned with performance. The different components of compensation – base salaries, short-term and long-term bonuses, Benefits, allowances, pensions – have often been managed separately and in isolation, even by different departments within the same company. Few organisations have assessed the overall costs, competitiveness and perceived effectiveness of the total package.
Moreover, few companies have really consulted with employees about which parts of the remuneration package are most valued. Indeed, employees are sometimes unaware of the existence, let alone the value, of certain aspects of their package – and sometimes value components of their packages quite differently from the cost to the employer.
Root and branch review
Organisations are likely to seek remuneration structures that reduce fixed costs – such as Benefits – and move more to variable pay and compensation that is more aligned with performance. The great advantage of this is that it focuses on the performance goals while building what economists call an ‘automatic stabiliser’ to the remuneration system. In short, if company performance falls, bonuses fall too, reducing total costs and so helping to preserve jobs.
Conversely, when performance improves, compensation rises. The other advantage of variable pay – or bonuses – is that in a low inflation climate they might be the only real vehicle for rewarding the contribution of high performers, as base salary increases will be low, if they are awarded at all.
Inflation forecasted to rise
By 2010, following the huge stimulus made to the global economy by governments, inflation is forecast to rise once more. The time for action is now – and with a root and branch review, this downturn may turn out to be a unique opportunity for companies to get back to basics. Because of the pressures to keep some companies afloat, the temptation may be to put such a review on the back burner. However, one day soon, it may be too late.
