Managing compensation in a turbulent economy
There, in black and white
NB Bulletin Vol. 12 N. 5, March 2009
The economic news over the past few months provides no shortage of signs that we are in a serious economic crisis. Some say it will soon be over, while others believe it could last several years. For the first time since industrialization, the economic outlook is influenced by divergent factors-a slowdown in global economic activity coupled with a shortage of qualified labour.
In this economic context, how can companies control their costs and, at the same time, keep employees engaged while preparing for the aftermath of the economic crisis when labour requirements will pose a significant challenge once again?
To be as effective as possible, companies should favour solutions that follow the three Ps-the three guiding principles for effectively managing compensation during a period of instability. They are:
Contrary to what might be expected, about 80% of organizations in Quebec and the rest of Canada will give pay raises to their employees in 2009. Why? Because they recognize the vulnerability of the psychological contract between an employee and his/her company and would sooner cut costs elsewhere than risk upsetting the "contribution/reward" balance essential to maintaining employee engagement and organizational performance.
Organizations are therefore likely to exercise prudence through means other than pay cuts or freezes. These exceptional measures are generally taken in extreme circumstances by organizations that have limited cash or reduced financial flexibility.
A prudent organization should instead opt for alternative solutions that would enable it to optimize its general compensation allocation-including monetary and non-monetary benefits-through effective communication. Faced with a need to reduce labour costs, a prudent organization could take the opportunity to review the effectiveness of certain programs while preparing to reconcile the generational preferences of its various groups of employees.
Here are some prudent alternatives for managing compensation in an unstable economy:
Regardless of a company's financial health, the current economic climate requires it to perform better. This creates an ideal opportunity for regaining robustness and efficiency after years of growth.
Performance is, more than ever, a central concern of managers and executives. This includes evaluating the efficiency of an organization's structure and processes and assessing employee performance. Performance could guide restructuring and-in all likelihood-dismissals poor performers will no longer be tolerated in a context of instability and performance improvement!
An organization that performs well should encourage recognition as a reward and adopt certain value-added measures. For example:
The current economic instability will not last forever-and persevering organizations know this. For this reason, they prefer to reconcile short-term business imperatives while preserving their "Best employer" status. This status is highly valued by current employees and is a strategic advantage for dealing with the upcoming labour shortage.
A persevering organization should also think long-term when making specific adjustments to total compensation. It could also take advantage of this period of instability to improve its value proposition to employees by conveying its compensation plan and working environment and reiterating what it expects from employees in return.
Thus, it could take the opportunity to revisit certain aspects of its total payroll allowance to better align it with the types of employees it wishes to attract and retain, while taking into account generational transformations that require flexibility; in other words, invest, innovate and improve the efficiency of its compensation infrastructure.
Prudence, performance and perseverance provide a simple framework for reflection. This model makes it possible to put into perspective the complexity of the optimal solution for dealing with short- and long-term instability.
In the current economic situation, this model also provides an effective way to convey guiding principles for compensation management. Moreover, communication is essential for reassuring employees about the company's vision, and explaining the measures taken to weather the storm.
A clear communication strategy inspires trust, nurtures hope, and focuses efforts to improve productivity and efficiency and to seek out new challenges.
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