As the COVID-19 pandemic continues to impact the global economy, many organizations face challenging decisions around compensation strategy, incentive plans and salary budgets. According to our 2020 compensation surveys and research, companies are considering a range of options including pay freezes, salary reductions, postponed salary review periods, and reductions or delays in merit increases, among other things.
With so many unknowns, can you afford to not have the most up to date market data intelligence? Our panel of experts discuss the complex questions facing compensation officers as organizations look ahead to financial stabilization and how reliable market data can help inform these critical decisions.
Keith Coull: Proper segmentation and an increased focus on your top talent should be one of the key areas of focus for the next salary review cycle. While this can be industry driven in some cases, identifying those colleagues who are critical to your business and those who are instrumental in driving the organization forward must be prioritized. This step will lay a strong foundation for decision making down the line based on strong market data as Evangeline outlines.
Evangeline Daquilanea: By now, we all understand how the pandemic has impacted businesses and employees. In response, organizations are reviewing the appropriate business models to pivot toward a new normal with minimum disruption. While these changes are being done, HR professionals should take advantage of this most opportune time to update programs and align with revised business models and strategies.
Specific to salary budgets, data shows that they have generally remained the same for most markets, according to our recent Salary Budget Planning Survey report. Notwithstanding, organizations must make sure that they use their budget wisely. Start with an articulated compensation philosophy that covers and addresses your company’s competitive positioning and clearly identifies how the company intends to address fair and equitable compensation and benefits programs. Having these in place will pave the way for transparent and easy-to-communicate salary decisions.
Ian Milton: Even during these challenging times, organizations can’t step away from core principles around fair and equitable pay. Leadership should look to organizational data to understand the employee demographics and to identify areas where the most likely gaps may exist. Furthermore, organizations should take this time to consider the impact of different reward tools.
For example, if the incentive opportunity represents a higher part of the pay mix, then consider reviewing the impact on Total Rewards, as the inability to deliver these incentives may create retention issues. Finally, review the value being delivered through benefits and allowances. Again, the inability to deliver on cash elements may be balanced by a strong benefits provision, which might need to be communicated more strongly to make employees aware.
Claudia Alvarez: As with other regions, Latin America is facing a deep economic challenge with an expected decrease of around 8% in GDP. Impacts may vary by country and industry, but some key actions that companies should consider include:
Tatjana Ricketts: From an executive compensation perspective, data is showing that companies less affected by the pandemic will likely make normal officer merit increases, but companies that have been severely impacted might refrain from increasing officer salaries in 2021 and instead deliver “pay increases” through higher long-term incentive (LTI) grants in 2021. On the other hand, merit increases for the broad employee population will get higher scrutiny than in normal years, especially for companies that imposed temporary salary reductions during the year.
Evangeline Daquilanea: With a limited budget, it becomes a test of our grit to adhere to pay-for-performance philosophies. When designing the salary increase or bonus matrix, careful thought should be placed around differentiation between an average performer and star performers. This kind of talent segmentation has helped a lot of organizations in the past and becomes crucial this year.
Our creativity will also be tested. With a limited budget, recognizing your high performers should not be limited to just monetary rewards. Pre-pandemic, successful examples of non-monetary rewards might have included dinner with the CEO or a special event for all top performers. For this approach to work, you need to know your employees well. Workforce analytics can be helpful in decision making and planning.
Ian Milton: Organizations should consider using recognition programs to acknowlege employee contribution in other ways. Also, consider pooling available budgets and reallocating based on position to market. For example, use targeted amounts to address competitive gaps for more junior employees, where small budget allocations may have a greater proportionate impact on employee engagement.
Claudia Alvarez: Companies should look for ways to recognize employees beyond base salary. Think about bringing new ideas that have a high value for employees but at a low cost. Some examples could include project recognition, paid time off, training and mentoring programs, and the like. Also, looking at variable compensation programs is important, and reviewing LTI programs in the region, with a goal of trying to design or increase sustainable programs. Finally, flexibility is still highly valued.
Tatjana Ricketts: For organizations still aiming to employ discretionary bonuses, there are several approaches to consider. Typically, in cases where some bonus adjustment is deemed appropriate, committees much prefer a rational basis grounded in ascertainable numbers — at least as a starting point for applying structured discretion.
Some companies are contemplating bifurcating senior executives from the rest of the bonus population. In such cases, treatment of executives or NEOs specifically would be less generous. Where performance results vary widely between geographies or business units due to the impact of COVID-19, some CEOs are inclined to discretionarily reallocate bonus funding but maintain same overall bonus pool. And finally, for companies that experienced temporary salary cuts, a majority are using unreduced salaries to calculate bonuses.
Evangeline Daquilanea: Employee engagement proved to be very challenging during the pandemic, especially where employees are working remotely. In such a situation, it is especially difficult to gauge the level of engagement. What we’ve seen companies do is introduce some spot recognition. This enables the managers or supervisors to quickly recognize team members for specific and exceptional accomplishment – a rather easy incentive program to implement with a direct impact to employees’ morale.
Ian Milton: Reduced target levels, realigned performance metrics to adjust for the impact of COVID-19, adjustments to performance management distributions.
Claudia Alvarez: Based on our surveys, 70% of companies are operating their current short-term incentive (STI) plans in Latin America. So, in the short term, companies will try to focus on the actual payments in 2021, balancing business results with meeting key performance indicators (KPI’s) and retaining key talent. Additionally, 83% of companies reported in our recent survey that they will apply discretionary payments to key talent.
Tatjana Ricketts: Many companies are reviewing metric selection and weighting while also considering wider performance ranges to account for uncertainty. But that said, most organizations are viewing plan design changes as temporary with the intention of maintaining their pay philosophy and returning to the previous design once the effects of the pandemic are not as severe and volatile.
Keith Coull: Attracting and retaining top talent should be underpinned by optimizing the market sources you have readily available. Using custom peer groups, cross industry allows for constant incumbent pay analytics. Specific groups of skilled employees may need to be recognized in slightly different ways.
For example, the data set focus for your artificial intelligence (AI) and digital talent may need to result in a push toward an AI-driven skills-based pay analytics approach. Pressure therefore on existing or traditional compensation design management needs to be challenged to understand whether it is still fit for purpose. The adoption of intuitive technology may help to achieve this.
The current economic situation has also elevated the importance of being more transparent, particularly around Total Rewards policies. Without transparency, employees are not able to fully understand and maximize their rewards. I think there is an opportunity provided in this pandemic for companies to communicate the value of their Total Rewards policies. It will help employees feel reassured that they are cared for and being heard. This will play a significant role in retaining critical talent.
Evangeline Daquilanea: Having an HR roadmap can help an organizations uphold its vision. Using the roadmap as a guide determines the best path to navigate from your current standing to the ideal state. Throughout this transformative journey, there will be times when a company’s 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 also be placed on who you want to be competitive with by peer group. But it should not stop there: The company should also determine the right pay mix for its employees, which again changes over time depending on 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 that you have access to the right tools and market intelligence.
Ian Milton: Trustworthy market data is the only way to measure and maintain competitiveness. Organizations should conduct regular assessments of market conditions in line with organizational demographics, consider repositioning their market competitiveness target and conduct routine analysis to determine whether the market median is still feasible for all levels. If not, should there be an adjustment based on skills requirements (e.g., premium for key skills, between median and lower quartile for surplus skills)?
Claudia Alvarez: Companies need to ensure competitiveness by leveraging data intelligence to review the market and their specific targeted peer groups. They should focus on comparing critical positions, key talent and the differentiators and advantages of their current compensation and benefits program against the market. Focusing on and effectively communicating the strengths of the organization’s compensation program is the key to success.
Tatjana Ricketts: As market uncertainty will continue into 2021 and potentially beyond, we will see increased pressure on organizations and their boards to make challenging, principled decisions and to infuse purpose, stakeholder capitalism and human capital governance into core strategies and programs. Environment, social and governance (ESG) metrics are also here to stay, and leading organizations will champion transparency as a fundamental competitive differentiator.