Volatile USD causing rethink
Jason C. Kovac, Certified Compensation Professional (CCP) and Certified Benefits Professional (CBP)
WorldatWork • firstname.lastname@example.org
As the global economy struggles through a recession, employers need to look closely at how they pay for talent. Critical elements of rewards – external and internal pay equity, merit pay as well as job design – determine how well an organization motivates its workforce, especially the key talent pool.
Challenges in Attraction, Retention and Motivation
For the rest of 2008, it appears that the tide of compensation and benefits rewards is not flowing in favor of workers. With salary budgets hitting historic lows and remaining there for the near future, and health care costs continuing to rise, employees could start to feel a hit.
Organizations need to conduct a thorough skills analysis otherwise they may begin to see key talent (defined as any individual contributor who plays a key role in the organization) move to positions with other organizations for more pay. Merit budgets hover around 3.5 percent and organizations struggle for the best ways to differentiate pay based on performance, so employees could realistically see an increase of 10 to 15 percent by accepting another job.
Employers are trying to enhance the employee value proposition by distinguishing rewards based on performance. In other words, with the little monies organizations have, the high performers are receiving a bigger piece. However, organizations will soon need to determine if they are willing to “break the bank” to keep this talent.
During economic downturns, employees are pulled by differing motivational pressures. This is where a holistic total rewards approach could play a larger part in the employee’s decision to stay or go.
The Importance of Job Design
It is important to determine how much a job is worth and how much the individual talent within that job is worth. Job design should be considered the cornerstone of any compensation program. If a role is determined to be key within an organization, it is important to ensure the talent within that role satisfies the requirements of the position and the organization is paying well for that talent. Organizations will need to review budgets and determine if additional training will increase employee skills, or if it would be more cost-effective to hire from the outside.
External and Internal Equity
Once job design is factored in, it is important that organizations determine the monetary value of the job. In times of recession, external equity of key positions becomes a focal point. External equity—more frequently called market pricing—is a tool that can be used to survey what the market is paying for a specific position to ensure your organization is paying competitively. If employees perceive that the company down the street pays more than yours does, this will create a major impact on retention as well as attracting a large talent pool. In a down economy, it is vital to keep a pulse on what the market is paying and beware that your organization is not losing its key talent because of stagnant pay.
Most organizations strive to find a balance between internal equity and external competitiveness. Internal equity is another way to assess pay when comparing the salary and value of not only key employees, but also of critical skills or unique positions that are essential to the success of an organization. This could be a buyer for a retail establishment or a programmer with knowledge of a specific program for a software company. Organizations usually command a pay premium over external market rates for these positions or skills. In an economic downturn, organizations need to know which positions are critical and ensure they keep a pulse on market data as well as apply an appropriate premium to retain this group of employees.
Merit and Incentive Pay Matters
Merit pay is often a good alternative to salary increases when the economy is unstable. These programs, where payment is contingent on performance, would only be offered if the employee performs to expectations or above. In order for a merit pay system to work effectively, managers need to be able to differentiate performance and the organization needs to be able to pay for those differences.
Managers often find it difficult to rate a low performer as low—knowing that they will not receive an increase this year. What typically happens is that most employees receive the base increase, with little or no differentiation between high and low performers. This can be a demotivator for high performers and a disincentive for low performers (because there is no real upside potential for high performance).
Even though merit increases have been relatively flat for the past several years, differentiation is attainable. Organizations need to be cognizant of who their high performers are and train managers to differentiate performance—this will lead to a system that will enable true merit pay.
Another tool that organizations will use during a recession is variable pay, or incentive pay, as both a supplement and in lieu of base pay increases. These monies minimize organizational expenses year over year, and still reward employees based on performance.
Outlook for Compensation
As budgets become tighter, more organizations are going to rely on performance differentiation and merit pay to attract, retain and motivate key and critical talent. As profits and revenues shrink, it will be interesting to see what trends emerge in employee compensation. Though trends for the past few years show that employees have a certain level of security at their current jobs and hesitate to leave for another opportunity, it is unlikely that an organization will keep all its employees. When the economy does turn around and profits return to business, look out for any feelings from employees that the organization “owes” them.
About the Author
Jason C. Kovac, Certified Compensation Professional (CCP) and Certified Benefits Professional (CBP), is a practice leader for WorldatWork. As such, he develops instructional course content in the disciplines of compensation regulations, job analysis/documentation/evaluation, base pay management, market pricing, statistical applications, and mergers and acquisitions. Kovac has authored three books:FLSA Compliance: An Overview for the HR Professional ; Job Evaluation: Methods to the Process ; and Elements of Base Pay Administration. He is in the process of writing a fourth book on career development. In addition to writing a monthly column called “Back to Basics” in Workspan magazine, Kovac has been quoted in Dow Jones, CNN Money, East Valley Tribune, Compensation and Benefits, Denver Post, Business and Compensation Solutions , jobsinthemoney.com, and many others. Kovac can be reached at Jason.Kovac@worldatwork.org .