It seems like we are in for a rocky ride in 2016. While underlying economies of many countries and the financial performance of many companies still appear solid, numerous firms are still preparing for a tough year.
In such times, there are numerous issues for management to deal with. However, in many industries, human capital is by far the largest expense, and usually the first thing firms look at when they need to control costs. With this in mind, how can organisations manage compensation more effectively when cost control becomes an issue?
There are four key areas for corporate boards, managements and human resources to review:
1. Market benchmark
Knowing where your firm is positioned in the market is a critical first step. For example, if your firm’s total compensation is benchmarked at the high end of the market against competitors, you have much more room to manoeuvre than if you are at the low end.
Moreover, understanding and revaluating your mix of pay (salary, allowances and short and long term incentives) is also useful. During uncertain times staff can often be happier with a larger salary and smaller incentive. Other items to benchmark include assessing your grade pyramid and front- to back-office ratios. For example, does your organisation have more senior staff as a percentage of total staff or do you have a greater percentage of support staff than your competitors? Answering these questions will help you make rational, versus emotional, decisions about cost control.
2. Salary and allowances
While a salary freeze is an obvious cost savings initiative, this is one of the most demotivational things a firm can do. Being selective about salary increases, for example, only providing increases to junior staff and/or high performers in middle-management while freezing senior management salaries would be a much more effective strategy.
One area of cost saving that may be more palatable is allowances. Housing allowances could be indexed to rents in the local market. Over the years we have seen a number of firms move to one consolidated allowance, which is typically not based on family size. There are also significant cost savings possible in medical, disability and life insurance expenses.
3. Short and long-term incentives
Refusing to pay bonuses can also be hugely demotivational for employees. Again, a more selective approach for rewarding bonuses can have a much more positive effect. However, management will have to be prepared to make very tough decisions and “zero out” poor and mediocre performers.
There are more creative ways to incentivise staff when there is simply no money for bonuses. Long-term incentive awards can have real value if the organisation has hit certain long-term performance hurdles, as employees believe they can contribute to turning the company around.
The best time to establish a stock-based long-term incentive plan is when the stock price is low. Refusing to pay bonuses, despite achieving financial KPIs (key performance indicators) will not only result in firms losing their top talent, but also damage their reputation in the long term and make hiring more difficult in the future.
Short and long-term incentives only work when management and staff believe that they will pay out if the firm and the individual perform. When this trust is broken, it is almost impossible to regain it.
“There are no jobs out there ... so why we do we need to worry about compensation?”
We have heard this said many times during downturns. It’s a dangerous mindset to foster in a company. If the management and human resources think this way about compensation; they probably exhibit the same mindset around giving feedback to staff, training and development and performance management.
Communication with management and staff from the top down is critical. Communication needs to be clear, honest and frequent, so that people understand why changes are happening and if there are possibly more changes to come. Failure to communicate formally and regularly will result in gossip and speculation, leaving employees feeling insecure, undervalued and disengaged.
A firm’s most valuable resource is its human capital and in times of difficulty, it is this very commodity that needs to be protected the most. We have highlighted areas of consideration for boards, managements and human resources to review and think holistically about to manage compensation spend and ensure this resource is protected in the best possible way in challenging times.
We have encountered several firms that have failed to effectively manage compensation changes in a downturn. It was no surprise that when the markets recovered, these firms had significant staff turnover and a reputation as a bad employer, which ultimately impacted its business results and long term profitability.
The writer is CEO of Aon Hewitt Middle East and Africa.