Compensation Dilemmas

As the economy starts to improve, more organizations are turning their attention to considering the best course of action for improving compensation competitiveness once resources become available.  Not all organizations have resources available right now, but the number anticipating taking some action is increasing.  A variety of recent surveys indicates that between 40 and 60 percent of organizations will take some type of compensation action this year.  Although this is exciting since it will relieve some of the uncertainty and need in most workplaces, it is only part of the picture.  Once identifying resources, the next big challenge is determining how best to allocate the limited funds.  Although this might seem like a good problem to have, it does present some interesting as well as controversial decisions.

Most employee surveys reveal that the average worker desires that their reward account for remaining with their employer, taking on the work of others as downsizing occurred, and dealing with the general stress of their business attempting to survive in such trying times. When employees comment on their expectations, the central theme relates to “being paid back” for their investment as well as some form of compensation for “weathering the storm.”

The intersection of employee expectations, available resources, and employer judgment poses two key questions related to the next step:

Should a broad, all-inclusive strategy of allocation be employed or a more targeted approach?

Most organizations have to decide between a small “across the board” increase for all employees or consolidating scare funds into a finite number of strategic compensation actions.  For an organization with a relatively stable market differential across the organization, an all-inclusive approach makes sense if resources are available.  However, when there are market differentials by classification, job family, or location, it may not be the most advantageous approach when competition is a concern.  As the economy continues to recover, these competitive fault lines move due to market forces and key staff may leave for better opportunities.  Consequently, overall relative market position of the organization, market position of specific classifications, and demand of the priorities should all be factored into deciding on the best approach.

Should we try to make up for the last four years when resources were not given to employees or start from today forward?

Given the slowness of the recovery, most organizations will be unable and unwilling to allocate sufficient resources to “make an employee whole” in the next few years.  If we extrapolate the pre-2008 trend until today, most organizations would need to increase current pay between 15 and 25 percent to “catch up.”  Not only is the cost unrealistic, the benefit from the investment would be short lived since most employees would view the action similar to a debt repaid instead of a recognition of sound performance.  Since the market as a whole remained flat over the last four years, most employees kept their pre-2008 relative position.  Specifically, if I was five percent below the market in 2008, I should be approximately five percent below the market now.  However, short of making up for lost increases and providing a reward, employees may not recognize initial compensation increases as worthy of the personal and professional challenges of the last four years.  A middle position adopted by some organizations mixes a partial increase to address the past coupled with a small annual increase for the current year.

What should you do? It depends on where your organization was before the downturn, what resources you have now, status of your current market, and where you want to go in the future.

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