Is the Economic Conundrum Shaping your Reward Agenda?

Is the Economic Conundrum Shaping your Reward Agenda?
Recession does not mean an automatic move toward pay cuts. On the contrary, employers are wary of cutting pay as employees start looking at opportunities that would let them maintain their pay levels as a bare minimum.

We live in a yo-yo world. Great resignation was the biggest headline in the HR world just a few months ago and now it’s the great “deprecession”. If only there was a crystal ball to gaze through and understand which side of the spectrum we stand. Is it depression or recession or a bit of both? Some fear the worst while the rest are still hoping to get away with a short-term downturn.

The corporate world went on a hiring spree lifting economic sentiment at the perceived end of the pandemic only to realize the flab that may have been built in the process. As a result, there is news about actual or planned layoffs on every forum currently creating a stir all around.

However, there is still nervousness about talent. Will the offer made to candidates stand the test of time until they have walked in on the first day or is the counteroffer going to be used as a weapon of the mass dropout? From the candidate’s perspective, there is increasing cognitive dissonance around their choice of the next employer. Their current employer is always a fallback option or a safe zone in a volatile economic scenario.

These myriad sets of variables can create an ambiguous set of expectations from the reward function. However, the economic conundrum does not necessarily mean working with a capricious reward agenda.

The Inflation Conundrum

Inflation is typically not the major determinant of salary budgets unless one is dealing with a hyperinflationary situation prevalent in countries like Argentina, Venezuela, Turkey, or Zimbabwe. These countries are faced with inflation rates ranging anywhere from 40% to above 1000% and systematic shifts in compensation are required to maintain minimum standards of living.

There has been a whole heap of bad press lately around wages not keeping pace with rising prices. HR leaders are under pressure to find the sweet spot between competitive reward and financial prudence in a seemingly negative economic climate.

Several organizations milked the downturn and a sluggish labor market during the pandemic by cutting down on compensation moves. They eventually faced the biggest challenge from the buoyancy in the labor market. Rising inflation was the last nail in the coffin as employees left in large numbers sometimes just to be at the right pay level.

Organizations that stuck to their reward philosophy are better protected if not insulated from the current spike. Compensation is no longer a point-in-time concept. The journey and growth potential are important to be communicated to create stickiness. Spikes or downturns are not representative of journeys.

News about salaries increasing came from every nook and corner. However, compensation surveys have till date not shown an equiproportional increase in pay levels. The pent-up demand for talent because of the pandemic had a greater impact on pay than inflation, especially for hot jobs and niche skills.

With recession discussions already gaining momentum insight surveys from most reward consulting firms confirmed that the majority of their participants were avoiding knee-jerk reactions to inflation. The great resignation has not had a visible impact on reported compensation levels apart from a higher premium for specific job functions.

The Recession Conundrum

Recession does not mean an automatic move toward pay cuts. On the contrary, employers are wary of cutting pay as employees start looking at opportunities that would let them maintain their pay levels as a bare minimum. Hence building up unrealistic pay levels for employees during heightened profitable economic activity needs to be evaluated from a medium to long-term standpoint. Top talent becomes even more scarce during an economic downturn and commands a bigger premium.

While funding aggressive compensation moves for the broad-based employee population does become difficult, maintaining a premium for top talent, investing in securing the hot skills the organization needs, and maintaining competitive positioning of recession-proof jobs can always be prioritized.    

Employees do not fear a pay cut or freeze as much as the ambiguity and suddenness of these moves. Transparency around pay determination or the basis of any adjustment can help suppress the angst when tough actions may be the order of the day. If there is a need to prune budgets evaluate which components of the reward offering offer the least value to cost ratios. The value here will be defined as having maximum impact or usage.

Are there perks that can be temporarily halted, will hybrid working help reign in real estate costs, or would we be able to protect a few jobs by removing a fancy dessert from the lavish employee lunch menu?  A more frequent review of business plans may be needed to understand how the changing macro-economic scenario is impacting growth plans.

While we are staring at a possible recession, compensation budget forecasts reported by organizations across the world remain at 2021 levels or see an upside. Time will tell if these are readjusted before actual pay changes are implemented. The longer the lead-up to recession the more prepared organizations can be to manage the reward challenge. This period can also be used for communicating with employees and sharing how the organization is trying to protect their interests garnering their buy-in in the bargain.

The Business Life Cycle Alternative

Booms and busts may cause temporary displacement but will seldom have a catastrophic effect on an organization’s business lifecycle stage. Identifying the stage on the lifecycle curve and aligning reward philosophy with it is another alternative for reward practitioners trying to change a reactionary mindset.

The figure below shows a model linking the business lifecycle stage and the competitiveness of reward offerings. An organization experiencing hypergrowth can have a market-leading set of reward offerings to attract and retain talent that keeps the momentum strong.

Being in the red zone for a hyper-growth organization would mean offering below-market or even market-equivalent reward offerings. This can lead to talent flight which in turn slows down growth. On the other hand, an organization in the decline stage may struggle to survive if it keeps loading its reward offerings. By being below or at par with market it can optimize its investment in talent groups that can help revive its fortunes.

The extent to which economic sentiment influences reward agenda cannot always be based on a set of linear interrelated factors. The strength of an organization’s talent management practices, robustness of reward communication, prevalence or absence of a culture of pay transparency and business outlook are aspects that can unlock valuable insights. 


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