Compensation Focus

The Big Compensation Mistakes Not to Make in the Current Economy (…Or Ever)
By Gregory A. Stoskopf

With many mixed signals still coming to employers regarding the strength and sustainability of the economic recovery, compensation competitiveness may not be at the top of the list of many organizations’ concerns. However, research and recent anecdotal data suggest that employers need to carefully consider what actions to take regarding compensation, as they may have significant consequences for the organization both in the near-term and a few years out. 

The following are some of the common mistakes organizations make in the current economic environment and actions to take to avoid making these mistakes. 

  1.  Not differentiating performance and rewards enough. It is more important than ever to make sure those employees who are contributing to the success of the organization are rewarded with the limited dollars available for merit increases and bonuses. Failure to do so can result in top performers being demotivated, demoralized, or worse yet, beginning to look at other options for employment that seem to offer greater rewards for their efforts. 

Preventing this from happening requires organizations to make hard decisions, both in rating performance and allocating compensation dollars. Redesigning the merit matrix may be required, as well as looking at incentive plan designs and how performance is rewarded.

  1. Assuming employees have no other options regarding job opportunities and not conducting regular market analysis. As noted in the first mistake, high-performing employees always have options. Assuming employees don’t have any options regarding other employment is often incorrect. Even in the current economy, employees who are technologically savvy or have degrees and experience in specialized fields are still in strong demand. The health-care industry is still hiring briskly, especially employees with specialized experience, and financial services have made somewhat of a comeback despite the uncertainty of the stock market and other factors.

    Just because the economy is weak doesn’t mean the talent shortages of the recent past have completely gone away. U.S. health-care reform may put even more pressure on the demand for health-care workers. And the divide between job seekers with the right skills for the jobs of today and those who don’t continues to grow. As a result, employers need to continue to conduct regular analyses of benchmark jobs to maintain competitive salary ranges as well as to determine appropriate merit increases and market adjustment budgets.  This doesn’t translate to increases across the board for all employees, but it does mean that employers should pay attention to compensation levels in their industry and stay competitive. 

    A side benefit from a cost perspective of this may be instances where the employer finds that some jobs have not increased significantly, ensuring that the organization does not overpay for some positions. Approaches involving paying special attention to market for critical workforce segments may allow the organization to focus market analysis efforts if a more extensive analysis is not viewed as necessary.
  1. Not making changes to compensation plans. Although there are seemingly hundreds of other initiatives competing for attention in the HR functions of most organizations in turbulent times like these, now is not the time to sit by and assume that the compensation plan designs, whether for base salary, short-term or long-term incentives, are going to work well in the current environment. The past two years have been anything but business as usual, and compensation plans need to reflect that and change along with the business model and environment of the organization. One question to ask may be, “What are the changes occurring in your industry?” Are they short-term or long-term? Short-term changes may dictate a review of base salary or short-term incentive plans, whereas long-term changes may indicate the need to look at long-term incentives, or a more comprehensive review of all the compensation programs for the organization. Updating the programs to better reflect the realities of the new business environment, as well as the current goals and objectives of the organization, may not only make HR sense, it should help the organization thrive in the current business environment.
  1. Not communicating compensation changes clearly. The only thing worse than not making changes to compensation programs to reflect changes to the business environment is to make those changes but not communicate them well. When compensation programs are well communicated, employees should understand how the new programs work and how they are going to support the new goals of the organization going forward. Spending adequate time developing a communication and training strategy is one way to help maximize the chances that implementation of the new programs or changes to the current programs will be understood and embraced by employees.

    Although there are other issues to consider in economies such as the current one, paying attention to these four areas can go a long way toward ensuring employers don’t lose ground regarding compensation competitiveness and come out of the downturn in worse competitive shape when it began.

About the Author
Gregory A. Stoskopf, CCP, is a Director in Deloitte Consulting’s Total Rewards Practice and a member of Deloitte’s Global Talent Steering Committee. His consulting expertise is focused on the design and implementation of strategic broad-based performance and reward systems, including talent and total reward strategies designed to enhance the attraction and retention of critical talent segments. His clients represent a broad range of industries including health care, financial services, pharmaceuticals, government, nonprofits and more. He is an author and frequent speaker on talent management, compensation, performance management and total rewards topics. He is a member of the New York Compensation Association, the Society for Industrial and Organizational Psychology, and WorldatWork.

Read the October 2010 edition of Compensation Focus.

Contents © 2010 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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