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WORKSPAN DAILY |

Rethinking Compensation in the Face of Uncertainty

What are other companies doing when it comes to salary increases, bonuses and other compensation? When it comes to rewards, this is by far the most common inquiry we’re hearing from MorganHR clients right now. The question reflects the sense of uncertainty organizations are feeling about the future in the face of the global pandemic.

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Companies across industries have been forced to pivot like never before in almost all business areas, from customer service and supply chain/logistics to recruiting and HR. A Harvard Business Review article points to Spotify, which relies on advertisers for revenue, successfully pivoting to original content in the form of podcasts. Artists and users uploaded more than 150,000 podcasts in just one month. And Unilever has prioritized packaged food, surface cleaners and personal hygiene products over other products such as skincare.

Given today’s dizzying pace of change, you can take advantage of how our minds are geared during such times. Fear and anxiety cause many to pause, assess and ensure their strategies are safe and appropriate. This represents a remarkable opportunity to harness that natural reaction and explore the validity of traditional compensation habits. Just because you might have secured a compensation budget for this upcoming January does not mean you should automatically provide annual salary increases and bonus payments on the routine schedule and adhere to the same historic process.

Now is not the time for business as usual. To retain top performers and engage employees, HR and total rewards leaders can learn from past decisions to help design and deliver innovative compensation strategies today and in the future. So, where can you start? 

Understand the Big Picture

First, assess what you think you know. The world has changed, and you must look at the big picture. Decisions made in the past were for a different time. For example, compensation plans were designed in light of last year’s economy and environment. Today, you must ask yourself, how is the economy doing? How is the business doing in the market? How could current and near-term events affect the company’s results?

For example, with the new work-from-home reality, corporations are reassessing their real estate footprints and reviewing leases to determine which physical locations are essential moving forward. As they look to decrease physical footprints, they’re increasing their digital capabilities, especially in employee engagement and collaboration platforms.

Given the rapidly changing environment, HR needs to become much more aware of the external market and economic landscapes. Sophisticated HR and total rewards professionals will focus on where the money is and how their companies perform against the market. If public, they’ll regularly check stock prices and compare them to overall indexes. They’ll have a finger on the pulse of sales and whether the organization is hitting revenue targets. From a compensation perspective, we see a shift to practices such as:

  • Tying long-term rewards more closely to individual performance with a direct line of sight for their contributions to corporate financial performance (e.g., earnings per share, relative total shareholder return).
  • Conducting multiple salary reviews for key individuals.
  • Increasing base salaries only for high performers.
  • Decreasing the frequency or size of promotional pay increases, especially as the pandemic continues, and HR leaders must reckon with its impact on the overall business.
  • Bonusing employees more frequently to connect timing to true pay for performance.

Finally, and of critical importance, MorganHR’s “2020 Best Practices in Employee Benefits Research Study” shows that, in light of the global pandemic and recession, health care is an essential element of today’s benefits package, especially with some studies indicating health insurance premiums could increase by 40% in 2021.

Adjust the Levers of Compensation

Just as organizations embrace nimbleness and adaptability by decreasing the number of SKUs or reducing their physical footprints, compensation strategy today must remain flexible. Based on what HR and total rewards leaders learn about the big picture, they can leverage new processes and solutions to adjust three key compensation levers swiftly: timing, amount and frequency. 

  • Timing. Companies are shifting away from the days of routine annual increases Jan. 1 through March 31. Once you’ve considered how the overall economy, market and business are performing, you can adjust compensation timing accordingly. Employers have moved salary review dates to fit their short- and long-term needs. Long-term needs may suggest that the first quarter is the best sales month so companies may choose to focus on that and move salary and performance discussions to the summer. Short-term needs may require a delay in implementing fixed, base salary increases due to current financial concerns. You might need to tell employees, “We’re all part of a business, and we need to delay merit increases until we secure the necessary cash reserves.”
  • Amount. Instead of 3% to 4% raises across the board, many HR and total rewards leaders are giving merit increases only to high performers and those who are making below market salaries. Compared to set increases budgeted at the beginning of the year, the amount will be more closely tied to corporate performance in terms of both market value and overall revenue.
  • Frequency. Bonuses, tied more closely to the business’ performance, will occur on a more regular basis, similar to how they function in sales departments. However, instead of rote annual salary increases, HR leaders will look closely at whether increases are merited for each employee. Were revenue targets hit? What does the market look like? What was that employee’s individual contribution? Are they paid below market value? Are they a top performer you really want to keep? What does the rest of their benefits package look like? Organizations will find that annual increases might not be necessary for many employees given business performance, or lack thereof. This is a major shift for businesses that traditionally have tied merit increases to an annual budgeting cycle, however, and will require change management and communications experts to convey the new strategy to your workforce.

Additional Considerations

Instead of looking at past performance when determining compensation, HR and total rewards leaders can look at how the business is doing today and how they can reward and incentivize top performers in the future. For mediocre or low performers, companies might forego compensation increases altogether.

Similarly, many organizations are on a semiannual promotion schedule. Now is the time to ask why. Why schedule promotions at all? Why not change the program? Now is a perfect time to set the compensation program to support the needs of the business versus feeding a habit, and you can work with sophisticated partners and leverage digital solutions to do so.

If your organization has the resources, you can build a compensation solution in-house. Those that don’t, can leverage an off-the-shelf solution. Alternatively, you might engage with a partner that has a broader, multi-industry view of the compensation landscape. When considering a compensation partner, work with organizations that can offer both corporate and compensation experience.

Finally, don’t pass on performing your pay equity reviews, during which the amount of salary increases and total salaries are regularly reviewed. In these times, you should conduct them more frequently. All too often organizations only perform these every two to three years. With diversity, equity and inclusion increasingly entering the spotlight, this could cause major problems for companies, especially those that do a lot of hiring. The bottom line is that you must look at pay equity more frequently and create a strategy to fix any discrepancies.

Embracing Uncertainty

Imagine what you can learn by exploring options without knowing all the answers. If you take a humble approach, examining what you know (and what you think you know), you’ll naturally ask the right questions. Don’t make assumptions, which could have detrimental consequences in today’s uncertain environment. If you can become comfortable with that feeling and resist making predictions, you’ll find that you can create a fluid compensation strategy. 

Building and embracing a nimble, flexible compensation program takes work, but there are partners and solutions that can help. Framed opportunistically, it’s a time to take stock of your total compensation program, determine how it measures up against the broader economic and business landscape, and see how it can work better for you. Consider surrounding yourself with experts who offer ideas and embrace simplicity versus bringing forward complex or ready-made solutions.

By optimizing compensation, you can attract and keep the best talent while encouraging them to work toward the best business performance possible.

About the Author

Laura Morgan is managing partner at MorganHR.


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