Compensation and HR professionals are under pressure to deliver competitive and cost-efficient pay programs. Here's how to ease that pressure.
Compensation and HR programs and practices have never been under a brighter spotlight. Global events of the past several years have caused a fundamental shift in the who, when, where and why of work, not to mention how it gets done.
These changes have put compensation and HR professionals under constant pressure to deliver competitive and cost-efficient rewards programs that attract and retain the right talent. Salary survey data plays a critical role in developing defensible compensation programs – but only if you use it the right way.
Our panel of experts sat down to discuss the complex questions compensation and HR professionals are facing, and what hurdles they may need to overcome going forward.
Q. What should employers think about during their annual salary review cycle?
Keith Coull: In today's dynamic and competitive business landscape, pay decisions continue to play a pivotal role in attracting, retaining and motivating employees. Compensation professionals must carefully assess multiple factors to determine equitable and competitive compensation structures that align with their organization's overarching goals and values. The process of making pay decisions goes beyond a simple salary figure; it requires a comprehensive evaluation of both internal and external factors.
Tight labor markets, cost of living concerns and the challenge of keeping top talent led to 2022 salary increases that had not been seen in nearly two decades. In 2023, average actual salary increases in the 15 largest global economies stayed high, and pay professionals forecast that those increases won't return to pre-2022 levels.
The intense increase in hybrid and remote work combined with digitalization has affected how organizations across all industries are assessing their need for critical skills, and this also will not go away. Along with these factors, shifting economic, regulatory and inflationary landscapes around the world must constantly be considered. Balancing affordability with segmentation remains crucial in both talent investment and returns the organization receives.
The ever-changing world of rewards is leading compensation and HR professionals to focus and prioritize how they think about pay, and that will remain constant for the foreseeable future. Confidence in the market data sources you use ultimately give you a platform to make better decisions and provide an opportunity to respond in a way that keeps your organization's people objectives aligned with business objectives.
Evangeline Daquilanea: The challenge for compensation and HR professionals has shifted since 2020. They are no longer overcoming the impact of the pandemic to business operations; rather, they are addressing economic and inflationary issues that are deeply affecting both the business and its employees. Additionally, there is ongoing pressure to increase salary budgets to help employees with rising costs. It is critical that compensation and HR professionals take time to untangle the issue of inflation and its perceived impact to salary budgets and realize the implications of any types of changes based on the economy. It's not an easy conversation to have with the workforce, but it must be done.
Ian Milton: The business climate continues to be challenging, whether you're looking at inflation, talent shortages or increasing requirements for pay transparency and equity. As we have said extensively, organizations must maintain the core principles around fair and equitable pay while at the same time considering the additional needs for thoughtful people processes and strong data integrity. Each of these factors impact the salary review, particularly as we see a push to optimize the salary review for cost and time effectiveness goals. Adding onto Evangeline's point, compensation and HR professionals need to plan for and anticipate the credibility of and messaging delivered based on the salary review.
Additionally, I would absolutely emphasize that organizations must continue reviewing the value delivered through benefits and allowances. Again, the inability to deliver on cash elements can be balanced by a strong benefits provision that might need to be communicated more strongly to ensure employees are aware. This is so important when the past couple of years have seen pay budgets stretched to breaking points – even when very strong, long-term benefits are offered.
Claudia Alvarez: As with other regions, Latin America is facing deep economic challenges, particularly with an expected decrease in GDP. Impacts may vary by country and industry, but there are key actions for compensation and HR professionals to consider:
- Focus salary budgets on key jobs. I expect that companies won't expand their businesses and hire significant employees in the coming months. Instead, they will look for key positions and hot skills to meet business goals.
- Be creative and trust leaders. Budgets will be extremely limited, so listen to local leadership to ensure all ideas and interests are heard.
- Be transparent. Employees understand quite well the economic challenges that the country and company face. They will appreciate honest, open communication both from and to leaders.
- Look for increases beyond once a year. Analyze ways to recognize and adjust salaries more frequently.
Q. How can my organization recognize employees' contributions and performance despite a limited budget?
Evangeline Daquilanea: Limited budgets become a test of our grit to adhere to pay-for-performance philosophies. When designing your salary increase or bonus matrix, think carefully about differentiating between average and star performers. This kind of segmentation has helped many organizations in the past and will be even more crucial going forward.
Compensation and HR professionals will have their creativity tested. With a limited budget, recognizing your high performers does not have to be limited to just monetary rewards. Pre-pandemic, successful examples of non-monetary rewards included things like dinner with the CEO or a special event for all top performers. For this approach to work, though, you need to know your employees well. Workforce analytics can be helpful in decision making and planning.
Ian Milton: When budgets are tight, it is entirely logical to feel nervous about how to recognize employees. That's where the creativity that Evangeline mentioned comes in. A recognition award for overall company performance, even if it's of a relatively small value, can be positively received by employees if it is clearly communicated with logic and purpose. The total spend doesn't have to be exorbitant for the emotional impact to be huge.
Compensation and HR professionals also may want to allocate a small budget to managers to recognize their teams' achievements; sometimes an individual award is hard to reconcile against a team effort, so perhaps that calls for a team night out, meal or cakes for all. I also would add that this comes with an obligation on managers to actually spend the budget, coupled with a communication that failure to do so may be viewed as negligence on their part. This may not suit all managers, but they owe a duty of care to their teams. They can be created, but they must use the budget.
Claudia Alvarez: I think it's also important to look beyond base salary. Ian and Evangeline offered some ideas about delivering high value, low-cost rewards to employees. Additional examples include project recognition, paid time off, training and mentoring programs and so on. Also, looking at variable compensation programs is important as well as reviewing long-term incentives in the region – all with a goal of designing or increasing only sustainable programs. Finally, flexibility in how, when and where work is done is still highly valued.
Q. What short-term incentive plan design adjustments have organizations made?
Evangeline Daquilanea: Employee engagement proved very challenging during the pandemic, especially with many employees suddenly remotely. In that situation, it was especially difficult to gauge employee engagement levels. We've seen companies introduce spot recognition programs that allow managers or supervisors to quickly recognize team members for specific and exceptional accomplishments. This is a rather easy incentive program to implement, and it has a direct impact on morale.
Ian Milton: Companies continue looking at the efficacy of their incentive plans, but primarily in terms of links to performance management and pay outcomes. This has been even more important as pay budgets have come under inflation-based pressure, organizations look at pay elements that do not automatically influence pension costs and can be treated as one-off expenditures. It is also an opportunity to emphasize to employees that the organization recognizes efforts that go beyond normal expectations. If companies want to see employees deliver more, then they need to provide a reason. We called these tools “incentives,” so I suggest that companies refresh the use of that definition.
Claudia Alvarez: Based on our data, most Latin American companies are staying with their existing short-term incentive plans. So, in the short term, companies will focus on actual payments, balancing business results with meeting key performance indicators and retaining talent. Additionally, many companies apply discretionary payments to key talent.
Q. How can my organization compete for and maintain its market position?
Evangeline Daquilanea: Having an HR roadmap can help an organization uphold its vision. It provides a guide for determining the best path forward toward an ideal state. Throughout this transformative journey, there will be times when a market positioning objective may change for certain groups, functions or talents. And, while it is important to stay competitive, a great deal of effort should be placed on who you want to be competitive with. But it shouldn't stop there: The company also should determine the right pay mix for its employees which, again, changes over time depending on the market, competitors and employee demographics.
With so many factors driving competitiveness, tools, software, predictive analytics and reliable market data are must-haves for HR professionals. Don't be left behind. Make sure you have access to the right tools and market intelligence.
Ian Milton: The basics remain: Robust and consistent market data is the only way to measure and maintain competitiveness. However, recent developments around open source and AI-drive solution creates a potential issue, in that line managers and employees are increasingly accessing market data themselves. The risk is that they assume that this data is robust, yet that data may not reflect a specific organization's reward philosophy. This leads to the potential for differences in interpretation and, of course, expectations.
Claudia Alvarez: Companies can ensure competitiveness by leveraging data to review the market and their specific, targeted peer groups. Compensation and HR professionals should focus on comparing critical positions, key talent and the differentiators and advantages of their current compensation and benefits programs against the market. Focusing on and effectively communicating the strengths of an organization's compensation program is key to success.
Keith Coull: Organizations around the world continue to examine ways to identify and maintain their market position. Every organization wants to be an employer of choice while ensuring a return on talent investment and reducing spend. Given current global economic conditions, salary budgets and how they are used is key to delivering effective pay for performance.
Today, pay decisions are not made in isolation. Companies have had to adapt to an ever-changing business environment, critical and high-demand talent and skills, and changing regulatory requirements. Compensation and HR professionals are constantly challenged in the way they approach pay in general and how they source key talent and skills. Industry silos are changing, and reward professionals must incorporate benchmark pay data across industries – and even into non-traditional market competitors.
Lastly, communication is so important when delivering key messages. Every effort you make to ensure a fair and equitable rewards environment is lost if managers and employees don't know or understand the value of what they are receiving. Help your workforce see beyond salary alone to other actions that rewards them appropriately and support their personal goals.
Making informed pay decisions is complicated; it requires a holistic evaluation of various internal and external factors. Organizations must strike a balance between attracting and retaining talent, ensuring pay equity and maintaining financial stability. By considering market trends, job roles, employee performance, pay equity and other critical factors, compensation and HR professionals can make pay decisions that motivate employees, support company growth and contribute to long-term success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.