29 January 2019

Last year, continuing economic uncertainty, low wage growth and talent shortages meant that the most effective reward strategies focused on maximizing organizational investment in talent in order to boost staff productivity.

Although little may have changed economically over the last 12 months, the outlook has changed in other ways. There has been much discussion of the future of work and what impact technology in general, and artificial intelligence software in particular, is likely to have on the way companies operate and reward people. Right now, it feels a bit as if we are stuck between past and future worlds, neither here nor there but rather in a state of transition.

But if you look back in time, this kind of economic stalling is a consistent phenomenon seen during the historical, technological leaps of the last 150 years, including the invention of the automobile and electrification. Productivity has tended to be slow in the decades following their introduction, even when they start moving into the mainstream. In other words, the economic impact of ground-breaking technologies often takes time to make itself felt as it is necessary to work out how to deploy them effectively first.

So what should the focus be this year in terms of pay and rewards to help support effective change? Here are five things to think about:

1. Prioritize compensation budgets to concentrate on key talent

As wage growth continues to be constrained in many parts of the world, it is easy to fall into the trap of making little differentiation between employees when handing out pay rewards. Some people refer to this as the 'peanut butter approach.'

But to really optimize compensation spend, it is necessary to move away from the traditional bell curve approach, which simply ends up allocating the majority of the organization’s pay budget to average performers. Instead it makes more sense to concentrate your expenditure on key talent.

First of all, however, it is important to work with HR and business leaders to understand what ‘key talent’ actually means in your company terms. Identify business-critical roles, which high value staff members could be at risk of leaving, and think about their skills in a wider market context. Remember that, ultimately, pay is your talent insurance.

2. Consider possibilities for replacing performance-related pay

During 2018, organizations continued to abandon annual reviews and performance ratings in favour of evaluating performance on a more regular basis using continuous, real-time feedback. But this scenario raises inevitable questions about how to manage performance-related pay in a rating-less world.

Trailblazer organizations that went down this route first adopted a mainly discretionary approach, allowing managers to make their own assessments. Some used shadow ratings during compensation reviews based on broader criteria than simply past performance such as promotability and potential, but this information would typically not be shared with employees.

Others tried stack ratings, where staff members are in essence ranked from one to x and pay is calibrated accordingly. Again, this information is not typically shared with the employees concerned.

In both cases, as a rating of sorts happens behind the scenes, such schemes may not sit comfortably with notions of fairness and transparency. In other words, it is important to find new ways of compensating key talent that can be understood and communicated effectively.

3. Explore reward segmentation

On top of all of this, another layer of complexity is beginning to emerge in terms of pay differentiation as the number of workers employed on full-time, permanent contracts starts to decline. This means it is important to find ways of managing rewards effectively for different types of workers.

To make life even more complicated, some organizations are already discussing whether to add bots to their company headcount, which raises the question of how long it will be before they have to go on payroll too? While this scenario may seem a bit far-fetched today, many organizations already have multiple talent models that co-exist as they increasingly understand that a one-size-fits-all approach to reward no longer works well.

This means that 2019 should be a time to consider how to combine a range of different reward approaches that match the company’s reward principals.

4. Personalizing rewards

Many employers that find themselves unable to offer big pay rises are looking for non-monetary approaches to help them engage their employees more effectively. While the focus to date has been on employee choice in the benefits arena, it has been less the case in terms of mainstream compensation, which still consists mainly of fixed and variable pay.

As organizations become more employee-centric though, it is likely that staff will want to see more flexibility and more available options in their reward packages. This could mean including more intrinsic reward items in the total offering or allowing more flexibility as to whether employees are paid in a fixed, variable, cash or non-cash way.

Staff want to make decisions based on what stage of life they are at and in line with their risk tolerance. So undertake an audit of the reward options on offer, how they align with different talent groups and whether they are effective or not.

5. Tackling pay equity

As pay gap legislation continues to emerge globally, employee expectations around pay equity and transparency are mounting, leading to the risk of increased litigation. As a result, pay equity is having an ever-greater impact on brand perception and, ultimately, an organization’s ability to attract and retain talent.

This means that, if you are not addressing this issue already, 2019 is the year to do so. Whether you operate globally or locally, it is imperative to identify where your pay gaps lie, what is causing them, what action will be required to reduce them and at what cost. Such insights will also help you address employee perceptions of pay inequity, which is mostly overestimated.

Conclusion

In 2019’s challenging employment environment, it is important to focus on the delicate balancing act of differentiating wages sufficiently to encourage high performance and staff retention, while also ensuring pay equity as the workforce continues to become increasingly diverse.

Note: this article was previously published, with slight alterations, at "Trends 2019: What's New in Pay and Rewards?" on the Global Payroll Association website.

Posted by Ruth Thomas

Industry Principal, Curo.

LinkedIn