Compensation Confluence: Navigating Uncertain Economic Terrain
Workspan Daily
July 29, 2022
Compensation Confluence
Key Takeaways

  • First-half flurry. Many organizations shelled out large raises and bonuses to attract and retain talent to combat turnover concerns amid a tight labor market and inflation. 
  • Same needs, uncertain economic outlook. An interesting conundrum confronts compensation professionals alike in the coming months, as planning and forecasting for 2023 comes with significant uncertainty and employee movement is still a chief concern. 
  • Rely on data and comp principles. Given the economic downturn and the budgetary constraints that are taking hold at many organizations, compensation professionals will need to rely on data and basic pay principles to chart the best path forward. 
  • Consider personalizing pay. It’s important to have a strong compensation plan foundation that is regularly updated to track pay at a job code level instead of an aggregate level. This means identifying skills or job codes that will require more of the available budget based on market demands. 
  • Salary budget planning for 2023. The key is allocating scarce resources for maximum impact and then effectively communicating pay strategy and decisions to the employee population. 

As the dust begins to settle on the hiring and spending frenzy that was the first half of 2022, some organizations are beginning to signal a course correction as a few economic indicators are beginning to point toward a recession.  

Market data foretold the first half landscape that was to come, as WorldatWork’s “Salary Budget Quick Poll” conducted in January and a follow-up survey conducted in February found a majority of organizations increased their planned 2022 salary budgets from projections made just six months prior to address the competitive labor market and inflation. 

Earlier this year many noteworthy employers were throwing the full weight of their compensation budgets at employees, including special bonuses in some instances, to retain employees and appease growing concerns of inflation. Perhaps nowhere was this more evident than in the tech sector, which experienced rapid growth during the pandemic, as consumers became more reliant on at-home entertainment and shopping.  

However, that same sector is leading the pullback, with Apple, Microsoft, Google-parent Alphabet, TikTok, Twitter, Netflix, Amazon, Shopify, Snap, Meta, Coinbase and more announcing job cuts, slowed hiring and reduced spending. Meanwhile, inflation is still hovering around 9% in the U.S. and Canada and is even higher in some parts of Europe.  

An interesting conundrum confronts compensation professionals alike in the coming months, as planning and forecasting for 2023 comes with significant uncertainty and employee movement is still a chief concern.  

“I think [organizations] are still nervous about whether their compensation strategy in this environment is sustainable,” said Boyd Davis, global head of compensation for Unit4.  

The other wrinkle is the post-COVID shift to more dispersed workforces, Davis noted, which complicates pay decisions as compensation pros grapple with geo pay differences within their respective organizations. Additionally, the increased access to remote opportunities is changing how employees view work and is a significant factor in the ongoing “Great Resignation” — although, it’s possible this employee movement becomes less pronounced in the coming months. 

“There’s never been anything like this in my life, and I think organizations have to make sure they get the basics right,” Davis said.  “I’ve had a lot of conversations with [organizations] and they’ve largely been in reaction mode — that’s a difficult place to be, and it’s hard to navigate in really volatile environments if you’re constantly reacting.”   

Given the economic uncertainty and the budgetary constraints that are starting to take hold at some organizations, compensation professionals will need to rely on data and basic pay principles to chart the best path forward.  

Davis said that while the macroeconomic environment will dictate the kinds of solutions that are available, he doesn’t foresee compensation’s role in attracting and retaining talent decreasing just yet.   

“Making sure the compensation review cycle is thoughtful because resources are scarce is critical,” he said. “I still see organizations struggling more to fill critical openings than they are scaling back. As of right now, I still see it as a workers’ market, but that is clearly starting to shift.” 

Having a formal strategy, whatever that may be, will be critical to executing on filling talent shortages with the available resources, Davis noted. He offered the strategy of being at 70% of the market rate on 90% of jobs as a plausible strategy that could be executed with more freedom. 

“Organizations are going to be a little more conservative with their budgets,” Davis said, “so to that extent, if they’re entering this phase with a compensation structure that doesn’t match their aspiration, it’s going to be hard to get to that aspiration quickly.” 

Planning Ahead  

While there will continue to be consternation about the economic climate and more noteworthy organizations tightening the purse strings, Davis said he expects highly skilled and technical talent to remain in demand the second half of 2022, which will require strong planning.  

“At a foundational level, the most difficult skills to hire the past six months will remain the most difficult to hire in the next six months,” Davis said. “From a compensation perspective, it becomes much more important to have a strong foundation that is regularly updated to track it at a job code level, not necessarily at an aggregate level.”  

Davis said this ultimately means personalizing pay to a greater degree and determining which skills or job codes will require more of the available budget based on market demands.  

“There are parts of the market where there’s upward pressure on salaries because the skills are scarce,” he said. “I do think it’s going to end up being job code specific as opposed to a broad-based environment, so it going to be key in how you make things more fine grained and personal than just looking at a broad brush across an organization.” 

As far as planning for 2023 salary budgets, Davis emphasized the significance of compensation practitioners assessing their organization’s performance, the sector/market they operate in and the level of workforce distribution that is expected. This requires monitoring salary budget survey data and market analytics for optimal results.  

However, Davis added, there also should be a fundamental understanding that there will never be enough, as employees will always feel underpaid. The key is allocating scarce resources for maximum impact and then effectively communicating pay strategy and decisions to the employee population.  

Being transparent about the organization’s pay philosophy and process is critical to executing an effective compensation strategy, Davis said.  

“Know that you’re never going to be in an ideal state,” he said, “but you’re a lot better off explaining to employees what you’re doing and what your end state is to give them confidence if they stay with the organization that they’re in, it’s fair and driven by the market.” 

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