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Upper Saddle River, N.J. – October 12, 2009 – Beginning in the third quarter of 2008, many companies found themselves between the proverbial rock and a hard place with reduced revenues, but with the pressure to maintain their high fixed salary and benefit costs of their employees. The majority of companies saw their profits erode at a much faster rate than the decline in their revenues. In response to declining financials, many companies took some dramatic steps; either freezing increases and/or implementing salary cuts. Now, as business seems to be improving, many are wondering if they should start awarding salary increases and restoring pay levels back to where they were previously. Even as businesses are starting to experience improvements, the expectations are that companies will be much slower to start staffing up; therefore, high unemployment will continue for at least 18-24 months. This will continue to lessen the pressure on companies to increase their salary and pay packages. The questions as to what they should do as far as increasing their compensation is certainly not simple. In order to address these issues, and before they rush back to their “old ways”, now may be a good time for companies to take a hard look at their Compensation Philosophy. Is the Philosophy properly aligned with the organization’s current business strategy and the realities of the marketplace? If the business model can support it, some companies are looking to shift more of their compensation costs from fixed base salaries to a combination of moderate salaries and variable at-risk compensation, which is tied to the company’s financial results. While this approach won’t work for all organizations, it is something to consider where the opportunity exists. For companies with employees that can clearly have an impact on performance, revenues and profitability, aligning part of their pay with the company’s financial results can be an intensely motivating factor. In other words, allowing the employees to participate in achieving the desired results can result in a dramatic Win/Win for both the organization and its employees. Not only do these types of incentives have to be carefully constructed, they must be properly implemented and communicated. Employees need to understand how the plans work, and what they have to do in order to reap the rewards. Now is the time to eliminate “entitlements”, which amount to payments that are akin to “Manna from Heaven”. Awards must be tied to achievement of specified, pre-established performance objectives. There should be considerable upside potential, such that if the company exceeds its goals for the period, employees should earn more than they would have under the previous compensation model. The potential is to reduce fixed compensation costs and reward performance when those efforts contribute to the overall success of the company. Not a bad result.
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