The COVID-19 pandemic has been a financial and social shock to businesses across our country and the globe. The impact of the pandemic on companies was initially predicted to be relatively short (the v-shaped recovery), but the effects are now likely to be longer in duration and the recovery slower, better characterized as a “swoosh” shaped recovery.
Changes to how companies operate are significant and evidenced by the increased demand for workers in jobs that are now considered essential, although they used to have a lower status in the economy, and the huge shift to remote work caused by office closures and social distancing requirements.
Now is a good time for companies to consider if their approach to compensating their workforce is still appropriate in the changed and continually shifting business environment.
Determining employee compensation is a balancing act
A company’s compensation strategy is derived from their human capital strategy, which in turn is derived from the business strategy.
The compensation strategy should address how the different reward components (salary, incentives, benefits, etc.) are balanced, how they will be managed, their external market standards, and the link between compensation and company results.
Emergency plans or contingency actions for the pay system are also worth considering, as compensation plans must become more agile with the changing business climate.
Changing business conditions resulting from COVID-19 may indicate a greater need to conserve cash, a shifting importance of different revenue sources or company goals, or the need to retain key staff.
Each of these conditions have implications for a company’s compensation system, which may involve changes impacting the entire company or just a specific employee segment, such as executives or the sales force.
Is your compensation strategy on autopilot?
Historically, firms adopt a compensation strategy and put it on autopilot; however, this approach is not appropriate in the current business environment.
The primary strategic compensation considerations for potential change are the balance of different pay components and how pay is related to maintaining or increasing company value. The balance of pay components can be considered across two factors, pay variability and time horizon, illustrated below.
Most private companies have low pay variability and a short-term horizon to pay; however, changes in a firm’s business strategy that call for greater cash conservation or the need to retain key staff suggest a greater emphasis on variable pay that has a longer time horizon.
This could be a significant shift in any company, but change is often perceived positively if employees can understand the reason for it, such as the impact of the pandemic on a business.
Is it time to make adjustments to your compensation strategy?
The strategic consideration of how pay should link to company results (pay for performance) is an important concept which is a primary goal of pay systems, although it is not often well executed. Increasingly, companies should consider more variability in pay that is aligned to company-wide results so that all employees experience the financial success of the business or, conversely, sacrifice during difficult times.
We are strong proponents of developing a formal compensation strategy that links compensation expense to business results, provides a clearly articulated compensation playbook that can be shared with employees, and identifies the most important business outcomes for employees to focus on. A well-conceived compensation strategy provides the foundation for effective and coordinated development of designs for individual pay components.
This is the first in a series of articles by the POE Group that will address the main components of pay and how they might be considered for updates or adjustments as the pandemic continues to impact the business environment.
- Joe Kager, Managing Consultant at The POE Group. Joe is a Certified Compensation Professional with over twenty-five years of experience in compensation and human resources. Connect with Joe on LinkedIn , call at 813-546-8628, or email him directly at joe.kager@poegroup.com
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