The Pressure Is On to Strategically Allocate Compensation Dollars

HR is finding itself in the middle of the Oreo — and not the tasty-treat kind.

The department is being sandwiched — in an analogy from Tammi Markovich, a global compensation leader, and WorldatWork faculty member and Compensation Advisory Council member — between cost-saving imperatives from organizational higher-ups, and employees facing higher costs and wanting to see their performance differentiated in their pay.

That heightened scrutiny from both sides of the company cookie is requiring HR to be increasingly strategic in its budget allocations. And, the department caught in the middle often has to contend with making difficult choices.

“Given the desire to push dollars to high performers or hard-to-find skill sets, limited budgets mean that merit and promotional dollars can no longer be spread evenly through the workforce,” said Sal DiFonzo, the managing director of compensation and rewards at Gallagher and a WorldatWork Compensation Advisory Council member. “The pressure means having tough conversations about delivering lower merit and bonus dollars to lower performers so budgets can attract and retain the highest-skilled or most strategic talent.”

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The Impact of Budget Pressures

What does this scenario mean in today’s HR budget strategies? For one, it equates to less of an across-the-board, “peanut butter” approach to salary increases, and a greater focus on what Markovich and DiFonzo described as a “surgical” approach to pay.

Companies are shifting away from traditional merit budgets and instead designing pay plans that are more variable, allowing for wider pay-for-performance outcomes, DiFonzo said.

HR teams also are assessing the trickle effect of shifts in the broader rewards arena, Markovich said. For instance, if the benefits provided to hourly employees cost the business more this year, will the company choose to increase those workers’ pay to partially or fully cover the difference?

“If we don’t cover any of it, that means [employees have] actually lost money in their take-home pay,” she said. “Looking at that leads into better conversations around benefit costs and how you can design the plans. That triggers different conversations that are outside of compensation, per se, but still important.”

The Demand for Thoughtful Strategy Is Ramping Up

Many of these conversations aren’t new, but they’re paramount today, said Sue Holloway, CCP, CECP, a WorldatWork content director. Organizations are juggling economic uncertainty and cost pressures with the demands of a labor market that, although cooler than it was several years ago, remains competitive.

That means looking at every budget decision made within HR’s walls — and being able to defend it.

“HR professionals have always been expected to be prudent stewards of compensation dollars, but today’s economic environment has raised the stakes,” Holloway said. “Employers still need to invest in talent, but they must do so more selectively.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Employee Compensation
• Finance and Budgeting
• Total Rewards