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Compensation Strategies That Work in a Down Economy

If you’re hoping for a magic formula for compensation strategies that work in a down economy, you’re going to be disappointed. This isn’t to say that compensation strategy isn’t important right now. Having a compensation strategy definitely makes a difference in your ability to engage employees, retain talent and thrive as a business. However, there isn’t a one-size-fits-all magical solution for compensation strategies that work. Compensation strategy derives from business strategy and thus is fairly unique for each organization.

However, having a compensation strategy is absolutely critical to a high functioning business. We know this because data from our Compensation Best Practices Report has shown a distinct correlation between top performing organizations and maturity in compensation strategy and reliance on multiple sources of market data to set compensation structures and monitor pay equity. In other words, organizations with mature compensation practices are more likely to exceed revenue goals than organizations that don’t.

During a recession or down economy, it is common for employers to wonder whether reducing wages for new hires might be a solution for a business in trouble. Pay cuts can be a necessary tactic for  businesses in troubled situations, especially in the unusual situation we are in now with coronavirus, but lowering wages is not the way most organizations with mature compensation functions try to save money in a normal recession. Considerable research has been done on why wages rarely fall during a recession, at or at least not to the same degree that businesses or the economy experience losses, and the reason is that the return on investment usually isn’t worth it.

This makes absolute sense when you think about it from the perspective of your employees. Even during times of economic difficulty, compensation is intrinsically tied to how employees value themselves and how they perceive that the business values them. Compensation is critical to employee health and wellness, impacting everything from social status to ability to pay bills. Cutting or limiting pay therefore has a demoralizing effect on the workforce, which in turn has a negative impact on the business. Lowering pay is especially dangerous in a workforce that is already stressed or burdened or  when it is applied indiscriminately across the organization without distinguishing between top-performers who are responsible for your organization’s success and non-top performers who are barely producing. It can also be highly demoralizing for college graduates new to the workforce, especially if they have grown considerably since they were first hired.

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There are exceptions to this rule, and managing the fallout of Covid-19 may be one of them. In the current, unprecedented situation, some organizations are cutting pay in order to avoid having to layoff workers. If this strategy is temporary, well-communicated and done for the benefit of employees, it can be well-tolerated.

Reduced compensation can also lead to pay inequity within an organization, with workers hired during a recession making less than employees doing the same job who were hired when the economy was stronger and employees hired after the recession making more. If employees become aware of these inequities, it furthers apathy and disengagement and eventually leads to unproductive turnover. This is especially true when economic conditions recover and wages don’t, or when employees realize the impact that reduced pay has on their lifetime earnings.

So what are the compensation strategies that do work in down economy? Are there any bits of advice that are effective for most organizations?

Yes, there are, but the compensation strategies that work the best are still going to be largely individual to the business and devised in partnership with executive management to fulfill specific business objectives. Still, there are some characteristics that are common to developing a competitive compensation strategy regardless of market conditions. Here are three of them:

1.  Define Your Talent market

Every mature compensation strategy starts with defining your talent market. Which roles or jobs are absolutely critical for business operations, both from a perspective of maintenance and from a perspective of growth? Where does the business struggle to compete for talent, even in a down economy (assuming any hiring is happening)?

Depending on your industry, the most critical roles in your organization may be related to the building or delivery of your primary product or service, such as scientists, software engineers or production managers. You might also want to think about jobs that are responsible for revenue and retention and thus in a critical position to impact customer perception of your brand, such as sales people and customer service representatives. If growth is important to your organization, you may to put a heavier emphasis on marketing or analysts.

Defining the talent you most need to perform at a particularly high level is essential to creating compensation strategies that work in a down economy.

2.  Know how competitive you Can Be

Not every business can compete equally in the labor market. This is as true in a down economy as it is in an economic boom when companies are prosperous and the war for talent is particularly competitive. Some organizations, especially large enterprises, are going to be able to offer larger salaries and more exciting benefits than small-medium businesses. Geographic location and industry also make a difference when it comes to wages.

If you are running compensation for a large enterprise, you probably have some idea of what your competitors pay and how to compete for top talent in the labor market. If you are running a smaller business, you may need to do competitive analysis to understand how companies of the same size and in the same industry are compensating and managing talent.

You also need to think critically about what working at your organization offers that other organizations don’t, especially if you are a small business competing against enterprises for talent. This is usually some aspect of your company culture and employer brand. When it comes to compensation, you will want to look at which jobs you can price at a higher percentile because they are absolutely mission critical for your success and which can be priced a bit lower with more emphasis on culture and total rewards.

3.  Choose what to reward AND COMMUNICATE IT

Compensation strategies that work put more focus on rewarding the behavior you want to see from your employees in order to compete effectively in a tough economy. Performance or incentive-based compensation can be difficult to structure but may be particularly effective during a down economy. According to CBPR, top-performing companies give more bonuses and more variety in bonuses than non-top performing organizations.

Once your organization has reached consensus on rewards, the next step is to craft a compensation plan. A down economy can be an effective time to create a modern compensation structure if your organization is currently behind in this. There are many operational nuances that you will have to decide. For example, you’ll need to determine merit pay processes and bonus types, how often to analyze the market for changes to compensation, how you’ll handle career advancement or promotions, and what to communicate to employees about your compensation strategy.

Even if you don’t have a lot of budget to work with, one area that can almost always use improvement and that will have a positive effect on your bottom line is to boost morale by conducting manager training on pay communications. Without effective pay communications, your employees won’t be informed on what the business has decided about compensation, which limits the impact of having a compensation strategy.

PayScale Client Example

Given our years in this business and the wide variety of clients we work with, PayScale has quite a few examples of compensation strategies that work. Here’s one:

Challenge: A large organization was concerned with how to decide merit increases across their workforce. They had a complicated internal job evaluation method for determining pay ranges, but it was not helping them stay competitive with external competitors.

Solution: The first step was to meet with stakeholders to work through the three questions above to get to the right pay strategy.

  • Who was their market? The nature of the organization meant that they were primarily competing for talent with government agencies, private enterprises, and casinos. They needed market data that
    represented the diversity of their business operations.
  • How competitive could they be? Their overall strategy was to be competitive with the market at the 50th percentile, but there were some areas (especially in healthcare) where this strategy was not going to work for them. So, they created a meet-the-market approach for most positions with an exception for high-demand areas. In those areas, they varied their strategy to target the 75th percentile.
  • What did they choose to reward? Knowing that they had some work to do to get their managers ready to reward performance, they decided to move forward with a raise strategy that rewarded employees based on their position against the market. For example, an employee who was paid at 80 percent of the market would receive a larger increase than an employee who was paid at 110 percent of the market. In time, they planned to add additional variables for rewarding performance.

Result: Since completing this exercise, the organization in question became well-positioned to compete for and retain the talent they needed to keep operating costs in line with expectations and communicate clearly with employees about their compensation strategy, leading to increased trust in HR and overall engagement.

Of course, this is just one example of a well-thought out compensation strategy that works. The major takeaway here is that there is not a single solution for every organization, but every organization will benefit from a compensation strategy, and especially during times of difficulty when employees have a lot of questions about their future and are looking to HR for guidance.

Tell us, do you have a compensation strategy that works well? What are you trying in the current climate that has received a positive (or not so positive) response from your workforce? We would love to hear about it.

In addition, if you are interested in learning more about our compensation management software and how fresh, Crowdsourced and Company Sourced compensation data can help you build a stronger, more engaged workforce in a tough economic climate, we have a special promotion just for you.  For a limited time, PayScale’s Crowdsourced and Company Sourced compensation data is available at no cost to MarketPay customers. To learn more, please visit: https://discover.payscale.com/free-data/.

To request a demo, contact us today.

Amy Stewart
Sr. Content Marketing Manager at PayScale
Read more from Amy

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