Compensation Whiplash – the movement of compensation up and/or down so rapidly it gives you a headache.
The recent labor market has hit HR/Compensation departments with a nasty concoction of variables – unprecedented labor market volatility, commodity price swings, hyperinflation, the great resignation, silent resignations, remote work, DEI, and 5 generations working together at the same time. If they feel like they have been at the end of a wild rope swing, it’s understandable.
Seven quick tips to put your team at the rope handle vs rope ending, so you can get back in the driver’s seat to reassert compensation control.
#1 Establish a Compensation Philosophy
While every company would like to have a solid compensation philosophy that aligns decision making around sound principles, less than 2% of all companies can point to a singular document that outlines the Company’s philosophy, how it relates to Company mission, Company goals and relates to the external market. A well-thought-out compensation philosophy that places more emphasis on variable pay and less on fixed pay can not only weather volatility, but really reward great performers. Once established, companies with solid guiding principles find they spend way less time in compensation decision wrestling matches and more time on the business at hand.
#2 Establish a Compensation Calendar
Most compensation calendars are built around “have to” year end events. Rather, a well-thought-out calendar can effectively time base salary increases, incentive plan design, incentive plan updates, incentive plan payouts, employment agreement reviews, severance benefit reviews, etc. If all things compensation are proactively set on a calendar, then negotiating one off requests is rarely necessary.
#3 Adopt a short-term incentive plan with best practices design
Attempting to establish reasonable metrics, targets and payouts during unprecedented volatility (up and down) can create real compensation headaches. Consider widening minimum and maximum shoulders and increasing discretion. As one wise Compensation Committee member said, “I know what is good performance at the end of year way better than an excel formula knew at the beginning of the year.”
#4 Adopt long-term incentive best practices
Long-term incentive prevalence has doubled over the prior 10 years, Why? There are a number of reasons, but first and foremost is, companies are coming into favor with hi-grading their compensation programs so they can better weather economic volatility while attracting, retaining and motivating star talent. One of the most prevalent solutions for such exercises is a best in class long-term incentive plan. Here is more on this topic for private companies.
#5 Don’t Chase Dollars
If an employee comes to you with a resignation because they have been offered significantly more, counter offers do little to restore the broken relationship. Added, you may telegraph to all other employees that you are open to negotiation. If you establish good compensation practices per #1 to #4 above, and then communicate frequently the entire total rewards position. The reason an employee leaves is typically not compensation related.
#6 Prepare for retirements
“By 2030, all baby boomers will be over 65 years old, accounting for over 20% of the U.S. population.” While far fewer companies have a fixed formula for handling retirement, it is a good practice to establish guiding principles so that you send the message to everyone in the community “we value long-term commitment and loyalty”. Your next best hire may be the referral of your last retiree. Here is a summary of good leaver policy considerations.
#7 Prepare for a transaction
Merger and acquisition activity has been at elevated levels the past two years and there doesn’t seem to be a slow-down. Putting together a market competitive severance plan while there is no M&A activity is the best time to address the potential issue. A company that is in the middle of a potential transaction process but does not have employee protection has real liability. Proactively addressing employee retention and severance during these stressful periods can go a long ways to ensuring a smooth transition.
