Managing compensation in a turbulent economy

There, in black and white

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:

• Prudence-control labour costs and expenditures;
• Performance-recognize performance while maintaining a pleasant and stimulating working environment in which outstanding employees continue to have access to opportunities for professional development and salary appraisals;
• Perseverance-look beyond the present and remain determined to emerge from this period of instability stronger than ever by taking advantage of unique, original business and development opportunities.

Prudence

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:

• Give employees more opportunities for work life balance or pre-retirement by working fewer hours (for example, 4 days a week);
• Set up a mandatory "A week off for me in '09!" program whereby employees take a week off without pay;
• Institute temporary spending cutbacks for social and/or training activities. Be careful! Reducing does not mean eliminating or abolishing!;
• Review group insurance cost sharing and examine alternative insurance policies to provide more flexibility at less cost;
• Provide a quarterly lump-sum amount in lieu of a pay increase, which enables companies under stringent financial surveillance to avoid a permanent payroll increase and/or layoffs. Be careful! This measure could cause employees to worry about the organization's long-term sustainability. Nevertheless, it is still preferable to a pay freeze.

Performance

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:

• Strengthening employee performance management practices;
• Promoting greater pay increase differentials according to individual performance, whereby:
  • Outstanding employees receive pay raises that are as high as those given during growth periods;
  • Only employees with lower performance are penalized.
• Reviewing the variable pay program to ensure it is adequately financed and able to recognize performance during the economic "storm." To do this, a successful organization should avoid implementing a variable pay program if it knows it cannot be adequately financed to enable bonuses to be paid out.
• Implementing specific incentives to align employee behaviours with specific productivity or efficiency objectives. Be careful! Employment security is not sufficient to maintain the loyalty of outstanding employees.

Perseverance

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.

Conclusion

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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