Compensation: Getting the Most Out of a Smaller Budget

Tough times call for artful compensation strategies, says the CEB's Michal Kisilevitz

By Michal Kisilevitz, Managing Director, Corporate Executive Board

With roughly 50% of organizations reducing total pay in 2009 compared to 2008, companies are struggling to motivate employees to perform at their highest levels at a time when performance is most critical. To address this challenge, successful organizations are using communications to articulate the value of their compensation plans, creatively exploring lower-cost alternative incentives, and changing existing incentive plans where opportunities exist to increase their impact.

Nearly half of companies indicated they are paying employees 15% less in 2009 than they did in 2008, according to a recent poll conducted by the Compensation Roundtable, the Corporate Executive Board's program for compensation executives. This decline is evident in all typical components of a pay package.

Salary increases in almost all organizations were lower than in the past, and in some cases not given at all. For example, roughly 34% of large U.S. employers polled in March didn't increase salaries at all, and most others reduced salary increase budgets relative to their originally planned amounts. As a result, salary increases averaged below 2% in 2009 compared to more than 3% last year.

While less common, a small number of organizations even reduced salaries. Globally, although numbers vary by region and country, the same trend generally follows: Salary increases were lower in 2009 relative to 2008, with a significant number of organizations not increasing salaries at all.

Bonus payouts fared similarly. Based on a February poll conducted by the Compensation Roundtable, 50% fewer organizations paid out target bonus amounts to their employees in 2009 relative to 2008. In addition, given that bonus payouts are largely influenced by the performance of the organization in the prior year, this picture will likely be bleaker in 2010, based on business results so far this year.

Finally, the value of long-term incentives typically given in the form of equity has suffered as well. As of the end of 2008, stock options at more than 70% of the Fortune 500 were worthless due to stock price declines, making this compensation vehicle, which traditionally has been used to motivate higher performers and senior executives, ineffective. And although many organizations have considered repricing stock options or buying them from employees, very few—under 5%—have actually done so, given the shareholder implications.

Unfortunately, most don't expect this situation to improve in the coming year. Most compensation executives polled expect pay to remain flat or even decline further in 2010.

With employees' pay significantly lower than they have come to expect, the usual approach to motivating and retaining employees is in jeopardy. This, along with other workplace challenges such as reduced engagement, has driven a decline in productivity of an estimated 3% to 5%. This comes at a time when employee productivity is most critical to companies' success.

And although some experts argue that companies do not need to worry about retention in an employer-friendly labor market, almost all companies are worried about retaining at least one key talent segment where they still are competing intensely for talent or have skills that are difficult to replace. In addition, many companies are justifiably concerned about the implication of current reductions in pay once the economy turns around.

All this combines to make pay a real challenge for many organizations. To address it, organizations must act now—despite the remaining uncertainty of the impact of economic and political forces on compensation.

The Compensation Roundtable identified three primary strategies that more successful organizations employ:

Communicate to maximize the effect of compensation plans. Most organizations do not share enough pay information with employees, causing employees to seek information from other sources. Unfortunately, employees most typically receive inaccurate pay information from those sources (friends, web sites, recruiters, etc.).

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