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How to Budget Compensation in a Volatile Economy

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Laleh Hassibi, PayScale

At the end of 2012, most businesses were very optimistic about job and economic growth in 2013. The trends from Q4 and early Q1 supported the fact that we were in fact rebounding quite nicely from the recent economic recession. There was a small worry that the impending doom of sequestration would occur, but most business leaders skipped optimistically into 2013 with confidence that Congress would come to an agreement, thereby avoiding indiscriminate, across-the-board spending cuts.

Then March happened.

March 4, 2013 is the day all that skipping slowed to a quiet, slow walk. The day that Sequestration really took effect marked a notable shift in the payrolls and the overall economy as optimism switched to concern. It’s a word that many business leaders never knew existed until recently, but now we hear it frequently, usually in conjunction with the word “can’t.” As in, “We can’t give raises, we can’t hire right now, or we can’t budget for compensation because of sequestration.” In many cases, all those “can’ts” may need to turn into “shoulds” to thrive through this economy.

Does Sequestration Affect My Business?

YES. The case is most clear right now with companies that depend on revenues related to defense spending or elderly care. Department of Defense and Medicare cuts have a direct correlation with furloughs and cut-backs in those businesses. According to Dan Walter, President and CEO of Performensation, “The initial impact to most companies (not direct government institutions) is the tightening of defense spending. If companies depend on that source for revenue they will be impacted quickly. It will be important for these firms to protect key staff members as they wait out a solution.”

So many companies support the defense industry that the trickle down effect may cause a ripple through the employment market that lasts far beyond this year.

Caution: Road Bumps Ahead

What about other businesses? Again, YES. Sequestration creates volatility which in turn creates uncertainty, and uncertainty creates even more volatility. That general volatility affects every business, large and small. We can’t accurately predict the long-term impact if this doesn’t get turned around, so volatility is likely to continue.

Volatility is something many businesses have already learned to weather. According to Dave Smith, Chief Revenue Officer of PayScale, “Since 2008 we are in a world where businesses no longer trust that what was recently true, in terms of the economy, their business, revenues, expenses, etc., will be mostly true in the near future.”

Keep Calm and Carry On

Yes, sequestration has created a volatile economy but business leaders need to channel their worry into proactive strategy if they hope to ride these waves and get back to skipping any time soon. According to Walter, “I do think companies will need to strategically plan for multiple paths for compensation budgeting.” Smith concurs, adding “Companies need to create a compensation structure that works in good times or bad, by getting a real-time pulse on market fluctuations, thereby making adjustments with confidence rather than fear. They can not only reduce uncertainty but also gain a leg up on their competitors. Companies leverage PayScale to be proactive vs. reactive.”

Here are key compensation strategies to help your business, and compensation budget, get through this period of volatility:

  • Hold on tightly to talent. Businesses need to hold on tightly to key staff while they get through the cuts. Now more than ever, your star employees need to know they are valued and you can do that with a solid pay-for-performance model that puts compensation dollars where they matter most.
  • Know when to hold ‘em and when to fold ‘em.  Don’t risk losing performers by underpaying them or losing money by overpaying underperformers. Pay extra close attention to flight risks and make careful decisions about which of those risks you should do something about. You may need to increase pay of top employees to retain them and keep your business running smoothly. At the same time, holding low performers at the bottom of their range or even out of range frees up budget to use more wisely.
  • Keep your finger on the pulse. Companies need a real-time pulse on market fluctuations to make adjustments with confidence rather than fear. What they do not need is 9-month old data in this volatile economy. Knowing exactly how compensation is trending in an industry and geography can not only reduce uncertainty but using that knowledge to proactively adjust pay ranges to match those trends can keep companies competitive. More than 2,500 businesses subscribe to PayScale’s software and ever-fresh database of salary data to get and stay on top of the market.

As companies realize their workforce—their talent—is the competitive differentiator, during the best and worst of economic times, solid compensation strategy becomes the secret sauce to succeeding in a volatile economy. In what may continue to be a volatile economy, companies need solid data, along with the capabilities to accurately analyze that data, to make informed decisions about allocating a limited compensation budget. The businesses that flourish through sequestration and volatility will be those that know how to get one of their biggest expenses, payroll, working for them instead of against them. 



More than 2,500 organizations use PayScale's subscription software to:


  • Allocate raises. PayScale Insight allows you to allocate raises based on employee performance and labor budget.
  • Attract talent. Price jobs based on your local market and competition.
  • Retain employees. Get pay right and show them how you did it. Your employees will be more satisfied to stay.
  • Drive performance. Get their salary right so they can focus on doing a good job.
  • Be confident. With know-how to talk about comp with anyone.

What are you waiting for?
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