Back in 2004 Lisa Audi of 3C Compensation addressed in an article what she viewed as the top 10 compensation issues at the time. Who could have anticipated then how very different things would be in less than a decade – economically speaking? Audi certainly did not.
But now, about 7 years later, no one would dispute that much has changed. We spoke with Audi to learn more about how the changes in the economy have impacted compensation, and what she might change about her Top 10 List to address today’s issues. The surprising answer is “not much.”
“I think it’s all about principles,” Audi says. She admits there are a few things she might add or at least emphasize more. For example, she wants employers to understand that compensation issues don’t go away just because employees aren’t leaving. “That’s one thing that was not an issue in 2004 that I think has become an issue, now and for the future. I believe it was a real mistake some companies made in 2009 to just ignore their compensation system because they didn’t have any retention issues,” she says.
“There was a landscape of, ‘I’m just so lucky to have a job,’ but that changes when jobs become more prevalent. And it is changing now. So one thing some employers did not get right, in 2009 particularly, was to think that people weren’t leaving so they didn’t need to worry about their pay system or monitor employee morale.”
“People remember how they were treated, and when they have more opportunity, they are going to leave. Employers aren’t yet seeing big exoduses, but I really believe in 2011 they’re going to see people leaving, and employers will be surprised that they weren’t paying well or that people were unhappy,” she says. “In 2009 no one squawked at all about not getting pay adjustments. And probably rightly so, because there were so many people who were not working. In 2010, employees were noticing that they hadn’t had an increase in two years. In 2011, these same employees are mad, especially if their organizations are on track financially.”
Ignoring Pay System = Falling Behind
Of course, many companies were unable to give pay increases during the height of the recession, perhaps even into 2010. But beside the employee relations issues involved, Audi points out that failing to address pay issues foils the carefully constructed compensation plans you may have developed before the recession. “One of our clients really wanted to do the right thing, but they just didn’t have the money. They designed a system in 2009, but they weren’t able to implement it. Consequently, they haven’t kept up with market (for job pricing). So now, they are about 5% or 6% behind, and how do they catch up? They have to cut back how they pay in comparison to the market, or make another transition.
“In contrast, some employers didn’t give increases because they didn’t feel they needed to. Maybe they felt like the market wasn’t moving, but in reality, it was. I feel like some organizations should not have chosen to forgo increases just because so many in their industry were laying off. If they had the money, they should have given increases because the market was, in fact, moving – solidly at about 1.5% to 2% in 2009 and 2% to 2.5% last year”
The result for firms that chose not to grant increases is the same as it is for companies that couldn’t: they are behind the market in terms of pay. Catching up could be a challenge.
Higher Pay Means Higher Expectations
Ironically, one of the items Audi mentioned in her article was, in effect, a caution not to overpay. She says the idea is more about making sure you get what you pay for. “Some organizations believe they are hiring the best talent, so they decide to pay above market – maybe at a 75th percentile pay rate, for example. They have no problem hiring, because they’re paying so well. But what’s often missing in the equation is to build performance expectations that match the higher pay. If you’re paying someone more than market rate, good for you – you got a good person, you were able to hire quickly, but if you don’t have performance expectations tied to it I don’t think it’s a very good value.”
“This might sound a little glib,” Audi warns, “but not all turnover is bad. Sometimes employers need to get rid of people. Maybe the employee isn’t bad, but is mediocre and the company could hire someone else who would make a stronger contribution. When you’re paying at the high end, you have different issues to deal with than companies paying at market. I can’t tell you how many times I’ve seen organizations that pay well, and their employees aren’t that happy. They think they’re being paid at market, until they go to look for another job and realize they will have a difficult time matching or surpassing their current compensation. It becomes kind of a negative, because they feel they can’t leave.”
How Much Should You Say About Pay?
Audi believes that open and honest communication about pay issues is important, but not all companies agree. “Some employers don’t like to communicate,” she says. “They feel like more knowledge is not good, that employees might misuse the information, or they might go out to the marketplace and try to validate the data. I don’t think you need to share everything if your organization is not comfortable doing so, but I do think every employee should know what his or her midpoint is, and that the job was taken to the market and this is how we arrived at its value. They don’t need to see all the detail behind it, but I think not sharing is more often a mistake than sharing.”
HR professionals know that pay for performance is no longer just for sales people and managers. More employees than ever before have some ‘at-risk’ pay. That said, Audi believes pay for performance programs must be thoughtful. “Creating a strong line-of-sight between incentive pay and performance is just as important now as it was in 2004 when I wrote the article,” she says. “But it gets back to balance. If your programs are balanced and the incentive did not pay out during a bad year, but it does during a good year – and it pays out really well during an exceptional year – then you’re doing something right. That was the message that should have been clear in 2009. If a program was designed appropriately it most likely paid less for the 2009 year, because most industries suffered.”
In the coming months, Audi believes the stabilizing economy will leave many companies with some catching up to do in their compensation programs. “There is still a bit of fear about the future, but we keep reminding people that the more they keep up with what the market is doing, the less of an issue they will have with being really far behind. One thing that wasn’t an issue in 2004 and is now, is some companies put in a pay structure a couple of years ago and didn’t do anything with it because of the economy or they stopped updating their existing structure because they did not have a budget for salary adjustments. Now, it’s 2011 and they should have adjusted it in 2010. You don’t want employees to be paid too low as things improve if something can be done about it.
“Don’t take your eye off compensation just because you’re not having turnover issues. If the financials of the company are good, there is no reason why organizations should not be giving increases.”
Read Audi’s original article, A Compensation Top-10 List, on 3C’s website, www.3ccomp.com.