In order to make those tough pay decisions, the starting place is to assess whether your C&B strategy is still fit for purpose. If your business strategy has changed as a result of Covid-19, so should your C&B strategy. It will also require some difficult investment decisions. Lastly, you will need to take a hard look at your actual pay practices and funding sources.
Don’t forget about the multiplier effect
Why is it important to have a good handle on your pay practices? At most companies, pay costs make up anywhere from 40% to 70% of a firm’s total costs. Employee base pay is generally one of the largest - if not THE largest - single pay cost for most employers.
Even for those employee groups where base pay is not the largest compensation item, the other elements in their rewards package are often multiples of it. Any increase in an employee’s base pay may also trigger increases in incentive or stock award opportunity, overtime pay, pension contributions, employment taxes, etc.
Therein lies a problem with spreading money around. If you are indiscriminate with your base pay increases, the economic impact to the firm does not stop there. Other items that have a bearing on the company’s financials increase as well. You owe it to your firm to maximize the return on its base pay investment.
Go lite on the peanut butter
“Too often, organizations adopt a 'peanut-butter' approach to talent investments that spreads the same investments … over the entire organization, in an effort to be fair by being equal.”
From John W. Boudreau, et al. Investing in People.
When I was a Region Total Rewards Director, post-2008 financial crisis we all too often faced the dilemma of what to do with small annual merit budgets. We worked with the likes of 1% in countries like Switzerland - and even smaller numbers in countries like Belgium. As the budget numbers were so tiny, a gut reaction by some was to argue that everyone should receive the same percentage increase.
We all naturally felt badly we could not do more for our people. But, would an annual base pay increase of 500 EUR (1%) for an employee earning 50,000 EUR be meaningful and reinforce desired standards of performance? Especially, when a spot recognition award might pay out a similar sum of money?
Even companies with a strong pay-for-performance culture were faced with a similar dilemma. That “Fully Meets” employee earning 50,000 EUR might receive an increase of 250 EUR. If a 500 EUR annual increase was not meaningful, a 250 EUR increase (0.5%) would be even less so. Would “spreading it around” really drive the achievement of critical business objectives? Your high performers would grumble they are not being recognized and your rank-and-file bedrock would complain their contributions were undervalued.
In his latest article, my BD Advisory colleague Michael Pos wrote about how important it is for companies to differentiate when designing and delivering incentive pay programs. I would argue that differentiating your base pay investment is equally critical.
In fact, in situations where the pool of money is small it is perhaps even more vital that you differentiate that investment.
You need to maximize what it gets you. Your first guidepost in deciding how to differentiate your base pay investment is to consider your company’s theory of its business.
Invest more where the payoff is highest
The ‘peanut butter’ approach “is in stark contrast to approaches taken with other resources, such as customers and technology, where investments are targeted where they have the greatest effect. Why not make greater talent investments where they matter most? Optimizing investments in people, by investing more where the payoff is highest, is what we call a 'decision-science' approach…”
John W. Boudreau, el al. Investing in People.
A company’s theory of its business tells you where it is heading, why it is taking a certain path, and how activities are to be aligned internally. Translating this into strategic workforce planning, it tells you which parts of the organization will play the most critical roles in the longer term. The business strategy then adds detail, telling you what areas of the organization are key in the lead up to the long-term.
From this kind of analysis, you may learn that securing talent in a particular business unit or a certain R&D area or a specific functional group is vital. With your people investment priorities clear, you have direction about where your scarce resources should go. On top of this, you can further differentiate your merit budget (and base pay spend) by overlaying pay-for-performance. In this way, money goes where it is most needed and the potential ROI greatest.
Prioritizing like I have in this over-simplified example is not easy. But, it must be done. Just as imperative is having a communications strategy in place. You need to be able credibly explain your principles and why these hard merit (and base pay) decisions have to be made. Even if employees do not agree with all of the specific actions, they will know the company has at its heart the best interests of the business upon which all depend for their livelihood.
Low hanging fruit is not enough
In my next article, I will pick-up with the topic of funding. Flat or shrinking budgets require creative ways to self-fund people investments. Companies often do not realize they are already sitting on a pool of money. Once organizations learn where to look, they can shake the tree and collect the ‘low hanging fruit’. However, finding the lion’s share of monies invariably requires a deep dive into actual pay practices – and addressing ingrained behaviors.