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Are You Adding Value Through Employee Compensation?

By Joel Myers

For the past several years, in January, surveys have been conducted to find out how companies have effectively reduced payroll costs.  While I admit to having a bias against the notion of saving your way to success, I wholeheartedly embrace the idea of investing your compensation dollars wisely.  Before sharing the results of a survey of nearly 500 HR and compensation professionals, conducted by Institute of Management & Administration (IOMA), Pay For Performance Report, we should look at the conflicting views that contribute to the cost containment debate.  Within an organization, the principal stakeholders have diverse and often conflicting objectives:

• Employees have a financial stake in compensation.  They want to be paid fairly, seeing pay increases at the market rate or better. 
• Human Resources is invested in the pay policy and in strategic application of compensation.  They want pay equity, consistency and have a defensible program.
•  Line Management wants to hire and retain the best people.  They would pay top dollar if it meant predictable, on target results.
•  Senior Management wants cost containment balanced with a need to be reasonably competitive.

In most companies, these differences are not talked about.  They surface when one of the stakeholders feels that needs are not being met.

Here are the top five strategies for compensation cost containment reported in the survey.  They are listed in descending order of popularity:

1. Reduce size of merit increases.
2. Hiring freeze/staff reduction.
3. Create greater distinction in the amount of increase between outstanding and average performers.
4. Altered benefit packages.
5. Institute pay-for-performance.

Items #1 and #2 have been widely used for several years.  While they efficiently reduce costs, they also create morale problems resulting in lost productivity that will erode the savings.  Typically, your best employees begin looking elsewhere and your marginal employees take cover.

Items #3 and #5 represent hopeful signs that companies are being a proactive.  With these two items, management is demonstrating leadership by putting a priority on performance.  When done well, these approaches will include effective measurement, feedback, and development.  Employees see how their performance is linked to bottom-line results, adding value that will help fund increases.

Item #4 has been an ongoing issue.  All companies are experiencing increases in their healthcare costs.  Common strategies for curbing the increases are plan redesign to reduce benefit levels and cost shifting to make employees contribute a greater share of the cost.  To make these changes more palatable to employees, options are being offered to allow employees to customize elective plan components to meet individual needs.

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