Facts and trends in compensation globally
The most successful programs are the ones where employees are not just aware but more importantly understand the logic for how they are paid and how much
The ability of a pay program to communicate and create value comes from the level of sustained communication, focus and organizational muscle that a company can bring in to making it work
Every year brings some hectic discussions and parleying on how things will look different in that year and how HR should start reinventing itself to get things right and how to face the whole new world. Everyone appears concerned about the ability of their programs to manage expectations of Millennials and the Gen Y population or how the rapid disappearance of bell curves and ratings would impact pay programs etc. In the midst of this hectic worrying and debates, this column talks about some facts that we have realized through our 20+ years of experience in observing pay programs in India.
The point of view expressed in this piece is based on two dimensions – firstly, a discussion on what we believe are some immutable facts about compensation management globally; and then a reflection of such facts against what we see are the realities of 2016 that HR and compensation managers can expect to face.
There are five fundamental factors for pay programs that reflect a somewhat long-term transition in thinking about compensation rewards. These are:
- Pay programs are as much about the content as about the communication: Annually we analyze compensation programs and data from over 1200 companies and one of the stark realities is that none of them are hugely different from each other – some people pay more than others, some focus more on benefits, some have more incentives and so on. But finding fundamentally different approaches towards pay is rare, and what really differentiates an organization with the other is in the ability to implement and communicate the objectives that their program is trying to achieve. The most successful programs are the ones where employees are not just aware, but more importantly understand the logic for how they are paid and how much.
- Differentiation is a wonderful thing, as long as it is perceived to be fair: Almost every pay program wants to drive differentiation based on either performance or potential or skill criticality or some combination of the three. Strategically, such differentiation is the best way to ensure that pay follows principles, but it is important for the entire agenda to be perceived as entirely fair by employees. Driving hard differentiation exposes the organization to significant risks if employees do not perceive fairness in the process.
- Same strokes for different folks is a black car from 1910: Over the last decade, there has been an increasing realization of the fact that uniform compensation programs across different employee groups, demographics and life stages can create very little value for companies. Organizations that are able to ensure that programs are more targeted towards different employee requirements are able to get far greater value for money. It is surely not easy to understand the creation of such bespoke programs, but the effort needs to be to make the transition over a period of time.
- Pay programs need to reflect responsibility: Pay programs over the last decade have reached a point where they need to reflect responsibility in not just towards the employee group that it serves but also towards different stakeholders. Boards and investor advisory organizations want to see responsible thinking on the alignment of pay with organizational realities and objectives, government and regulators want to ensure pay practices don’t create imbalances in objectives and outcomes and the broader society goes against organizations that reflect inequity. The long term trend has been to ensure that any new pay programs are analyzed through all these lenses before being implemented.
- Force is mass multiplied by acceleration: Finally, Newton’s Second Law of Motion is true for compensation programs as much as it is in nature. No program, however well designed can actually meet its mark unless organizations stick to it over a period of time. The ability of a pay program to communicate and create value comes from the level of sustained communication, focus and organizational muscle that a company can bring in to make it work. The positive or negative effects of employee programs are rarely visible in a short while and need sustained focus before it actually starts to have effect.
With these fundamental tenets in mind, the year will see volatility in the market and therefore there is a need for organizations to be hawk-eyed on costs and margins; more visible action from the government to boost economic activity and therefore a clear imperative for organizations to ensure capacity and capability when the economy revs up; Consumer Price Inflation might see fluctuations and in all possibility an increase, thereby putting pressure on pay revisions; attrition levels will not dramatically move up in the short run and will broadly remain within a ±1% range and disruptive organizations will keep impacting business models and organization structures requiring HR to remain vigilant
The key actions for compensation and HR managers intuitively present themselves when we club the long run fundamental dynamics from an HR perspective along with the immediate macro business environment.
- There will be pressures on compensation budgets: Fixed compensation increases are being scrutinized with far more care and caution and the Aon Hewitt Salary Increase Survey for the year shows a drop in growth budgets over last year. Compensation managers will be pushed to go a longer distance with a smaller pay budget and therefore the need to focus more strongly on communicating the objective, rationale and quantum of pay in a more holistic manner. This is a year for organizations to actually focus more on defining what their whole Total Rewards offer represents and effective communication of rewards will be critical.
- Boards and shareholders will demand more differentiation: An immediate outcome of smaller budgets is the need to ensure that the allocation of pay budgets is sharply done to reward those who deserve or hold potential vis-à-vis doing a blanket increase. Companies will need to ensure that whichever form of performance differentiation philosophy they approach, it will be important for ensuring that there is the least amount of perceived biases in the system.
- The impact of multiple generations on the workforce will be more profound: Any changes to pay programs will need to ensure that they are evaluated from the lenses of how different generations in the organization would respond to that change. The focus of all new or modified programs will need to be structured to ensure that they are relevant for this workforce that is constantly evaluating these programs against what these disruptive businesses are building.
- Organizations will need to think more aggressively on health and wellness to drive longer term value: Companies will need to invest into health and wellness programs with a long term return timeframe in mind. The long term positive effects both from employee wellbeing and engagement as well as lower insurance costs and productivity will be significant for companies.
These changes, however significant or not, will be the ones that will be top most in the minds of most HR and compensation managers. Rewards decisions are not short term. Organizations that stick to a long run plan towards doing things are always more successful than ones that respond to market pressures.