The economy is forcing just about every organization to closely re-examine its compensation practices and make some difficult decisions … some of which will prove to be game-changers, shaping the role of compensation in the years ahead.

Many organizations are struggling with difficult questions related to retaining and engaging their key talent while determining the right mix of market competitiveness versus current affordability and longterm sustainability.

In this article, Mercer compensation experts globally briefly address some of the top questions that clients are asking as they set their compensation agendas for 2010.

Question: Given that we froze salaries and made promotions this year, how should we handle employees who are well behind the desired market position?

Response from Shinny Feng, principal in Mercer’s Shanghai office: This is the most frequent question we’ve received from clients over the last few months, and it’s no wonder. Our research shows that only 28 percent of companies around the world made salary increases as planned enterprise-wide. That means three in four companies either froze salaries at 2008 pay levels, made pay increases for just certain employee groups, deferred pay increases or decreased salaries from 2008 levels.

When your company is in a position to start making base salary increases enterprise-wide or for certain employee groups, there are a couple of things to take into account:

• First, consider which actions set in place over the past 12 months are “game changers”; few people anticipate that we will go back to business as usual. This may mean that your company is truly embracing a pay-for-performance culture or that base pay increases occur every two to three years as responsibilities change, not annually.
• Second, determine if the affected business unit, job function or geography is leading value creation and deemed a “performance driver” in your organization. If so, consider differentiating that group by making base pay market competitive right away; you can’t afford to lose your high potentials. If employees are not part of the “performance drivers” workforce segment, then perhaps move to market-competitive pay over time. These are certainly tough choices. 

Question: Since our annual incentive programs are not paying out, what should we do?

Response from Iain Morris, principal in Mercer’s Toronto office: This is an important challenge that many organizations need to address given the current market. The answer really depends on why the incentive plans are not paying out. Ask yourself a couple of questions:

• Is this situation predominantly a result of the current economic situation? If so, then it may be best to “stay the course” – incentives are supposed to vary with business performance.
• Has your business changed fundamentally? If so, it’s likely that some performance measures are no longer aligned with your company’s new business strategy, and the annual incentive plan design should be reviewed.

A number of my clients are redefining the “right” results on which to pay incentives and introducing new incentive program measures that recognize today’s difficult forecasting environment. In some cases this has been as simple as adding a greater degree of discretion into the plan – moving away from a purely formulaic approach. Other organizations have added operational metrics to their plans, placing the focus on performance that is clearly within management’s control.

Question: In what ways can we incentivize and engage our high-potential employees without cash?

Response from Loree Griffith, principal in Mercer’s New York office: There is always a market for high potentials. In fact, in a recent Mercer study, we found that 37 percent of organizations globally will continue to hire key talent even as they reduce their workforces overall.

Here are some creative ways to engage high potentials that are short on cash but long on sweat equity:

• Enable “career pathing” by showing possible directions for advancement. Providing clarity to high potentials around career choices they can make within your organization, skills they need to have and future responsibilities helps them focus on performance and the future.
• Develop and implement an employee communication plan to minimize distractions and increase productivity. The more effective communication campaigns reinforce the employee value proposition, involve all levels of leadership and employ various mediums (from in-person meetings to online clickbooks or blogs).
• Tune up your performance management process. Effective performance management enables an organization to differentiate among performers in a fair and transparent way.

Question: How can we interpret market compensation data and use it responsibly?

Response from Shinny Feng, principal in Mercer’s Shanghai office: We all face a real dilemma in using market data responsibly because of the prevalence of salary freezes and the economy affecting geographies and industries differently. Yet we see a need for just-in-time information, given employers’ desire not to fall too far behind and risk losing their best talent. 

During this time of market unrest, the main point here is to emphasize internal affordability over being market competitive. This means that companies are fine-tuning their pay-for-performance programs and making informed decisions based on quantitative analysis of their HR information systems as well as payroll, finance, operations and customer data sources.

Getting back to the specific question, however, it’s important to understand the market data used in the analysis. Be aware of how the survey samples may differ from prior years and know if zeros are included in the average – that is, data from companies that froze salaries. As a general guideline, if you are concerned about the overall labor market, then use the aggregate; if you are concerned about a specific peer group, then use the actual average increase of that group.