The Ritz Herald
© Pepi Stojanovski

How to Effectively Tackle the Most Unusual Compensation Cycle Ever

With immense economic challenges in today's environment, here are three key steps to guide year-end compensation plans, while preparing for continued uncertainty ahead

Published on September 14, 2020

There is no doubt that 2020 will go down as an extraordinary year. The humanitarian and economic toll of the COVID-19 pandemic has been felt far and wide. For total rewards professionals, this means year-end planning for 2021 will certainly deviate from the norm. In fact, for some companies, the usual plan of action may be completely irrelevant. So, how does one deal with the forthcoming cycle when everything feels so different?

To begin, even those fortunate enough to be part of an industry that has been largely unaffected by the pandemic, the usual tactics are still worthy of review. Yes, some companies, such as those in online retail or essential goods and services, may have benefitted when the government shut down many non-essential, in-person businesses. Even so, if business remained prosperous, it’s likely competition did as well. Therefore, companies need to assess the rising demands of employees and deliver accordingly if they want to retain them. Remember, the best talent always has options in the marketplace.

Unfortunately, for many rewards professionals, the core focus for the remainder of the year will be quite different. As the year-end compensation cycle approaches, firms will face new challenges and unforeseen questions that were likely not accounted for in their 2020 strategies. As this somewhat daunting task is tackled, it’s important to remember to not bury heads in the sand — there is much more to do this year than normal, and planning needs to be more effective than ever before.

To that end, Aon has outlined three key steps to take to help guide businesses through the most unusual year-end compensation planning cycle.

Step 1: Determine Your Business Priorities

Prioritization is important when analyzing your compensation cycle strategy. Start by defining the overarching short-term goal of your business. If cost-cutting is the top priority, evaluate which parts of the organization are carrying too much capacity. If operational flexibility is key, determine where you have opportunities to shield the organization from unnecessary expenses in the short term.

Once your top priorities are determined, you must be able to identify the staff that you want to retain and, just as importantly, review your ability to exit less pivotal colleagues from the business with minimal reputational damage or disruption to operations. However, most employers would agree that layoffs should be treated as a last resort. Reducing your workforce may have a further negative impact on both cash flow and morale. There are also legal factors to consider. In some parts of Europe, for example, cutting staff can be very difficult and expensive due to the strength of the Works Councils. Therefore, it is common for organizations to look for alternate, more creative ways to manage cost before even contemplating this option. Headcount reductions could also potentially exacerbate diversity, equity, and inclusion (DEI) issues and limit pay equity progress.

If changing your business model is the answer, have you identified employees with the right skills and flexibility to adapt to this new corporate strategy? If you are going to aggressively try to capture market share left behind by failing competitors and grow your way out of the doldrums, do you have the right sales capabilities and talent on board to deliver? How do legislative programs aimed at easing the impact of COVID-19 alter the path forward for your company or the alternatives available? For example, in the United States, some industries, such as airlines, made commitments around employment in exchange for government funding, while other companies utilized supplemental federal funding for unemployed workers to keep employees whole or above whole and increase short-term organizational flexibility.

Whatever your business is proposing, ensure that your people and rewards strategies are ready to support the plan in place. Rewards professionals need to make the case to business leaders for a more strategic approach to allocating incremental spend in advance of 2021.

Step 2: Take a Triple-Headed Approach to Your 2020 Compensation Review

Once your go-forward strategy is clear, it will provide you with your direction. However, there is still a great deal to sort through regarding the finer details. We recommend breaking these challenges into two parts: What do you need to do to close out 2020, and what do you need to do to plan for 2021.

It may sound obvious, but there has never been such a clear-cut need for effective employee communication strategies. Expectations should be set well in advance of typical year-end processes. Move this “to-do” item to the top of your list and make sure senior management owns the message you wish to convey. If a wait-and-see approach is necessary to ensure operational flexibility, communicate early to ensure employees know what to expect and the metrics by which leaders are guiding their decisions.

Overall, a triple-headed approach to the 2020 compensation review will be needed. This includes:

Identify colleagues that are behind the market
Use a performance management system that will decide which colleagues are top performers
Implement a business strategy that will dictate which jobs will be prioritized
Many organizations are increasingly applying an equal pay lens to this part of the process by addressing internal equity before looking at the external pay market. Social and regulatory environments in various countries around the world, mean that internal equity often takes precedence over external data. This also makes it more challenging to focus pay increases on priority jobs.

However, external data can’t be ignored. If you lag the market, it’s important to be aware of this reality. When the current downturn cycle ends (and it will), your employees will have choices and other opportunities to pursue. Therefore, being clear about where you sit relative to your competition is a crucial component for planning ahead.

Step 3: Reevaluate Your Target Setting for the Future

In addition to closing out 2020 as strongly as possible, firms need to have a solid plan for 2021, with a focus on target setting. You need to certify that 2021 targets are in touch with reality. For instance, increasing 2020 results by 10% may be too low, however, trying to bounce straight back to 2019 high points will likely be idealistic for many companies. This year’s target-setting process requires critical thinking and the use of strong market data to make informed decisions.

When contemplating your course of action, rewards professionals should note that while most employees may accept a poor pay cycle in 2021 in exchange for job security, disappointment will prevail if the market perks up but the 2022 pay cycle still generates a zero return. Thus, we advise you to be as proactive as possible — planning ahead to allow the bonus pool to reignite for recovery in 2021 actually needs to happen now.

Looking Ahead

As mentioned earlier, one of the key differentiators for engaging companies is the strength of its internal communication program, which starts at the top. Unfortunately, employees are likely to feel angst and disappointment due to market conditions, making it even more crucial to engage with your leadership now, develop core messaging, and prepare workforces for what lies ahead. By being clear and transparent, it instills a sense of trust and gratitude that will in turn keep engagement levels high despite the difficult business climate.

All in all, the forthcoming compensation cycle will be hard work. Whether companies have resources to spend, job security but no budget to offer, or in the worst-case scenario, are looking to cut costs across the board, there is always work to be done. However, by following these steps and carefully thinking through compensation strategy, firms can have a solid finish to an arduous year and hold onto a positive outlook for a brighter path forward.

Finance Reporter