Crash Course in ... rewarding people in a downturn

As 2008 draws to a close, your people's excitement about their end-of-year bonuses is tempered by low expectations and apprehension that this might be the last bonus they see in a while. With 2009 looking bleak, how are you going to work out what to pay everyone?

by Alexander Garrett
Last Updated: 31 Aug 2010

Cut your cloth. 'The first consideration for companies will be to set their overall pay budget on the basis of what they can afford, not on what the market is doing,' says Chantal Free, a senior consultant with remuneration specialist Watson Wyatt. Companies in dire straits should consider a pay freeze or even a pay cut.

Pay for real performance. 'It's time to be more focused on performance that really has a quantifiable impact on results,' says Julie Naismith, head of UK reward practice at consultants Towers Perrin. 'To do that, you must be sure that you have the right processes in place.' Getting incentives right will ensure you hold on to the best people and that your business is performance-driven, she says. Mark Hoble, a principal at HR consultants Mercer, adds: 'You should focus your spend on people in critical roles and talented people coming up through the organisation. It's time to maximise your return on investment in human capital.'

Revisit targets. There's no point in keeping targets that can't possibly be met; that's the path to disenchantment. 'If your targets are already a stretch, you may have to review them, with reduced incentives,' says Free. 'If they were easily achievable, you may decide to let them become stretch targets.'

Review the mix. It's an opportune moment to look at how your pay budget breaks down by base pay, performance pay and benefits, and whether you are in line with your competitors. 'You may decide that it's time for the fixed piece of pay to be held down, and any extras including bonuses to be performance-related,' says Hoble.

Factor in your values. 'The culture of the organisation should influence how you respond,' says Ruth Bender, a senior finance lecturer at Cranfield School of Management. 'In some companies, people will vote to take a pay cut or waive their own bonus to keep colleagues employed.' In others, it's everyone for him or herself.

Know your workforce. Weigh up who is likely to walk if their aspirations aren't satisfied, advises Bender. That may depend on local job prospects as well as how financially motivated different groups are. Regular 'pulse' engagement surveys keep you in touch with whether morale is at risk.

Think total reward. 'What engages people is the total deal they get, not just money,' says Naismith. 'That includes training, benefits and the work environment. Some of those rewards, such as development and flexible working, can improve engagement at much less cost than extra pay.'

Do say: 'Remuneration has to reflect each individual's contribution, but also what we can afford in difficult times.'

Don't say: 'This recession offers a brilliant opportunity to cut back on staff pay.'

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