Compensation planning in a slowing economy

The right data and tools help HR make informed, credible decisions
By Vivian Dell'Agnese
|Canadian HR Reporter|Last Updated: 11/13/2001

The current economic environment is fuelling many challenges and difficult decisions for human resource professionals. From a compensation perspective, tough economic times mean the coffers may be light or even empty when the time comes to grant pay increases and bonuses for 2001 performance.

Tough messages on the compensation front are just part of the challenge for organizations grappling with declining market conditions. Other challenges include trying to maintain focus on business priorities while implementing major change initiatives such as restructuring, workforce reductions or hiring freezes. As organizations facing these types of changes can attest, maintaining employee morale and retaining top performers become especially difficult.

The right data and tools, however, can help human resource professionals make informed decisions when dealing with the implications of tough economic cycles, so they can focus their efforts and develop credible responses.

On the compensation front, knowing what other organizations are doing or considering may help in defining compensation strategy in the current environment. Research from consulting company Towers Perrin provides some insight into how the economic changes in recent months have affected compensation planning.

Towers Perrin’s Salary Management Survey, completed in August, revealed that projected salary increase budgets for 2002 averaged 3.8 per cent. This was up one per cent from the overall average projections a year ago.

Given the changing economic climate and recent global events, Towers Perrin conducted a second survey in October to assess whether organizations were planning, or had introduced, changes to initial compensation planning projections. The results of the survey provide noteworthy insights into the state of compensation management across a broad spectrum of Canadian organizations.

Most recent survey data suggest that projected salary increase budgets for 2002 have decreased slightly to an average of 3.5 per cent from the original 3.8 per cent reported earlier.

Respondents were asked whether they have made or are planning adjustments to their rewards programs. Many respondents indicated they are taking a “wait and see” approach. About 70 per cent of the respondents have not made any changes to salary increase budgets, although 28 per cent have reduced their budgets to date or plan salary freezes. Further, of the organizations that have not made adjustments to their salary increase budgets since the events of early September, 21 per cent are considering adjustments in the form of lower budgets or planning for salary freezes.

Given the move towards performance-based pay, 90 per cent of respondents indicated that salary increases will be awarded based on individual performance which may include zero awards for low performers. It is important to remember that rewarding high performers, even during tough economic cycles, continues to be a factor for retention of these employees. Other forms of rewards, such as non-cash awards, may also be a consideration for organizations facing lower or zero salary increase budgets.

Surprisingly, more than 60 per cent of responding organizations indicated that initial projections for annual incentive plan payouts have not changed since their original forecasts, although 40 per cent expect lower payouts. With respect to stock options, more than 95 per cent of respondents that offer this type of long-term incentive indicated that they will not be making any changes to their stock option programs. Nonetheless, the survey reports 55 per cent have experienced a decrease in share price since July and 55 per cent reported that they have employees who hold underwater stock options (the current share price lower than the grant price).

Although some organizations may be delivering some tough pay messages in the months ahead, open and frank communication can help them weather the storm. Employees will need to understand the business reasons why pay increases or bonus payments may not be as robust this year as they might have been in years past. They will also need clear direction about where the business is going — and where they should be focussing their efforts — to help the organization succeed.

Finally, organizations need to let top performers know they are valued whether it be through higher than average increases, non-cash recognition or positive feedback from management.

Vivian Dell’Agnese is a compensation consultant in Towers Perrin’s Toronto office. She can be reached at (416) 960-2846.

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