Facing compensation uncertainty

Rethinking approach to employment deal helps savvy organizations weather stormy times

Lean compensation budgets. Low employee morale. Disengaged “survivors” of organizational downsizings.

Most HR professionals would agree tough economic times yield a wide range of HR challenges. While it isn’t always possible to turn a sow’s ear into a silk purse, savvy organizations understand it is the “employment deal” in total rather than any single component that shapes the ability to recruit, retain and motivate people.

Many organizations are taking a more holistic view of compensation, and introducing strategic changes to ensure they are doing what it takes to motivate and retain employees, without breaking the bank.

Organizations are taking steps to ensure they are effectively balancing employee and business needs by:

•undertaking more sophisticated employee research;

•rethinking compensation philosophies and program designs;

•engaging managers more effectively in people management processes; and

•better defining career paths and professional development opportunities.

More sophisticated employee research

Although many organizations engage in some form of employee research, some derive more value from this exercise than others.

Traditional employee research has often focused on employees’ level of “satisfaction” with HR programs. Contemporary approaches to research, however, focus more on what drives employee behaviours including their intent to stay and commitment to deliver.

Organizations want employee research to address key questions such as:

•What do employees really value about working here?

•How do employee needs and values differ?

•Do employees understand what is expected of them?

•Are there any areas where we are vulnerable to undesired turnover? Why?

•Are we investing our HR dollars in an optimal manner?

•Do high performers have different expectations?

Organizations are also increasingly turning to Web-based research tools to facilitate more sophisticated approaches to data gathering and analysis.

Rethinking of compensation philosophies and program designs

During economic boom times, compensation programs appear to hum along nicely. Organizations still contend with a variety of HR issues, including the need to retain and engage talent, but compensation programs themselves seem to meet business and employee needs, as evidenced by healthy base pay increases, generous incentive awards and lucrative stock options.

The recent economic downturn, however, has highlighted the fact that the financial prosperity of recent years masked some critical compensation design issues.

According to Towers Perrin research, 31 per cent of organizations paid little in terms of incentive awards last year, and 18 per cent of firms paid nothing. Asked about 2002 performance bonuses, 20 per cent of firms polled are predicting the lean times will continue. (For more information on this and other recent salary surveys click on the related links article below.)

While this may be grim news for employees, it suggests compensation programs accomplish what they are supposed to: incentive award payments are limited or non-existent when corporate results are poor.

Unfortunately, many organizations have found themselves paying incentive bonuses when business results are dismal at best. This can be due to plans having poorly defined, “squishy” goals or a significant component based on individual results or other goals that may have a weak correlation to overall financial performance.

Organizations in this predicament are responding by reviewing annual incentive plans and, in many cases, all of their compensation programs, to ensure that they are closely aligned with the business strategy.

This starts with a review of overall compensation philosophy and asking some important questions:

•Is the organization comparing itself to the right organizations when reviewing the competitiveness of compensation arrangements?

•Is desired market positioning still appropriate, given financial performance?

•Can the organization “afford” compensation programs as they now stand?

•Is the pay mix still appropriate? Should variable pay become a bigger or smaller part of the mix? What should the role of long-term incentives be? Who should be eligible for them?

•Are the right measures being used? Is there a need to change the emphasis on individual or corporate results?

•Are management and staff clear about what it takes to earn a base pay increase? Is the spread between what a high performer earns versus an average performer appropriate?

The need to address affordability issues becomes all too clear during tough economic times. The resulting changes, however, will ensure organizations have the right links between compensation levels and financial results.

Better engagement of line managers

Year after year, surveys and research indicate leadership effectiveness is a top people issue for many organizations.

For example, Towers Perrin’s recent study on talent management issues, New Realities in Today’s Workforce, found that employees generally gave their managers low marks in areas most strongly linked to employee engagement. So what are companies doing in an effort to address this issue?

Unfortunately, not much at present although engaging line managers more effectively in performance management and people management processes remains high on the HR “to do” list.

The challenge for many companies is that, in these volatile business times, training budgets are often the first to be cut or eliminated as organizations trim costs.

This short-term focus may leave organizations between a rock and a hard place when it comes to the issue of leadership development and management training. Employee engagement and commitment is becoming much more critical to driving business results, so a greater emphasis is being placed on good people management.

The result of this emphasis on management effectiveness has been an increase in the level of support being provided to managers, particularly in the key areas of pay for performance, goal setting and communication to employees regarding business goals and priorities. The most forward-thinking organizations have been developing tools and processes to assist managers in increasing their skills in these areas.

Organizations that seek to engage line managers should ask:

•Are managers being provided with all the tools and support they need to be effective? Does the organization know this?

•Are the right people promoted into managerial roles?

•What else can be done to assist them?

•How will the retirement exodus prompted by retiring baby boomers impact the ability to fill management roles in the future?

Better definition of career paths

Employees are more likely to stay with an organization if they believe there is a light at the end of the tunnel and a path to get there.

To that end, organizations are placing an increasing emphasis on career pathing as a means of retaining and engaging employees.

Career paths aren’t being designed just for office-bound professionals. Retail organizations and call centres, for example, are finding that the ability to offer career paths can give them a competitive edge when it comes to hiring and retaining employees in customer service roles. Some organizations are also defining career paths for sales people, to more clearly define role accountability and how they align with sales incentive opportunities.

Although well-defined career paths can be a critical component of a strong employment offering, some Canadian organizations will suggest that creating career paths is easier said than done. HR professionals within Canadian subsidiaries of U.S. organizations will sometimes complain the parent company is, in fact, their biggest competitor for talent. Bigger U.S. companies have the size and scope to offer more extensive opportunities for career progression and promotions.

Some Canadian subsidiaries also struggle from an employee retention perspective when the U.S. parent maintains the “strategic” decision-making roles, leaving Canadian employees to simply “execute.” Some organizations have stepped up to this issue by ensuring some strategic roles are based in Canada and also by using North American teams to ensure Canadian employees have a voice at the table.

Claudine Kapel and Mairéad MacLure are consultants in Towers Perrin’s rewards and performance management practice in Toronto. Claudine can be reached at (416) 960-7515 and Mairéad can be reached at (416) 960-7715.

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