10 questions to ask before changing pay programs
The economic challenges of 2008 set the stage for a tumultuous start to 2009. Companies gearing up for the year ahead should zero in on a strong human capital strategy that allows them to retain high performers and remain mindful of compensation, all while planning for the future.
Approaching retention in a downturn
Cost reduction is a critical agenda item in the current economy. For many companies, the knee-jerk reaction will be to cut costs quickly on personnel-related expenses, since these make up a significant share of total expenses. But while labour may seem like an obvious expense, holding on to top performers during the downturn can actually help you stay afloat and reduce costs over the long term.
To survive, employers need a deep talent pool. They must be able to tap into different competencies and experiences to build the best survival strategies. Once the markets stabilize, the company needs to be in the best possible condition to swiftly take advantage of opportunities, whether that means moving into new markets, widening product and service offerings or capitalizing on emerging and evolving customer needs.
Making blunt staff cuts simply doesn’t work. HR professionals must stress this point to their organizations’ management teams and emphasize the importance of retaining high performers. The teams have a pivotal role in ensuring productivity and output are maintained during both the cost-cutting process and in the long run.
Start by looking at the big picture. Identify all areas — from reducing inventory to making better use of real estate assets — where the company can spend more effectively. This will help the organization make truly informed cutback decisions (staff or otherwise) while maintaining the critical skills to get through the tough times.
The financial crisis makes it more important than ever for Canadian companies to scrutinize compensation packages, especially when it comes to variable pay. Many Canadians who rely on performance-based pay will likely take home a lot less in 2009.
But changes to pay programs affect numerous stakeholders in the form of accounting, reported earnings, disclosure and tax implications. Although boards of directors are feeling the heat, it’s important to consider long-term implications and make smart compensation decisions.
Before making any changes to pay programs, the board needs to ask a number of critical questions:
• Has our compensation philosophy changed?
• How are we structuring and negotiating compensation packages?
• How relevant is market data in a rapidly changing environment?
• How are we approaching CEO recruitment and compensation?
• Do short-term incentives create short-term thinking?
• How should we pay for real, sustainable performance?
• What can we do about underwater stock options?
• Are there other ways we can compensate top employees, like moving to whole-share awards?
• Do we need to eliminate the existing plan altogether and start fresh?
• How can we mitigate the risk of losing our needed talent and top performers?
With these questions as a guide, companies are able to put compensation plans into perspective and potentially identify creative ways of addressing the issue, while still helping the bottom line.
Always a silver lining
Even in trying economic times, it’s important to look beyond the here and now. In recent months, the business world has changed more quickly than anyone could have predicted. What remains clear is organizations need to work harder to manage risk and plan for a worst-case scenario.
For HR professionals, this creates an opportunity to take advantage of the renewed interest in risk and cost management and ensure the corporate plan takes people issues into account.
In a recent survey, Ernst & Young found global executives at Fortune 1,000 companies see HR issues among the top five business issues impacting a corporation’s results. Despite this, 41 per cent say their boards of directors never formally review the companies’ HR risk profiles, or only review them on an ad hoc basis.
HR should talk to the board and communicate with senior leadership. Make sure the organization recognizes the importance of managing HR risks — from retaining top talent and improving compensation planning to designing a path for the future.
When balance returns to the markets, many will find it difficult to see a silver lining in this global financial crisis. But organizations that seize the opportunity to build better and stronger risk-management strategies for the company as a whole — and the HR function in particular — will be best positioned to grow and succeed.
Ronny Aoun is an executive director at Ernst & Young, based in Montreal.