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Does your reward system measure up?

Padmaja Alaganandan & Gangapriya Chakraverti | January 27, 2009

At virtually every forum we speak at or interact with clients, there is a lot of interest and concerns around salaries and rewards in the current scenario. The challenge most companies face stems from increasing pressures to manage costs with very little corresponding alleviation of the need to engage and retainĀ  people because top talent can always find a place to go, downturn or not.

Companies also realise that their "solid citizens", too, feel insecure and anxious and that they have to be engaged to give their best during these times, rather than being overwhelmed by despair and pessimism.

The tyranny of the short term

There obviously is a sea change today when compared with the conditions that our clients faced during the years of hyper growth. There are a few commonalties that concern us though, and they mostly revolve around how short-sighted companies' responses can be. During the times of growth, many companies just wanted to throw more money at the problem of rewards and retention hoping that this would resolve the issue. At that time, several companies took short-term measures that have since then proven to be unsustainable.

Now, with the increased economic pressures, they are looking at different kinds of short-term measures once again, which involve cost-cutting through a reduction in manpower or rewards or both.

In this article, we will address three points. First, what does the concept of total rewards mean, and how does this apply in a downturn. Second, given the cash constraints and the need to leverage high performance, is this a good time to introduce or drive a variable pay scheme and if so, how? Finally, if a company has already implemented a rewards programme and finds that it is no longer sustainable, what can it do now?

Total rewards and cost saving

Total rewards essentially entails understanding the real needs of your target audience and tailoring a set of incentives - monetary and non-monetary - that address their needs and are tied to business results at the same time. It involves a balance between three factors: the company's point of view, the employee's perspective and the costs of the programme.

The company's point of view requires incentivising and rewarding the behaviours and metrics that drive overall company performance. The employee's perspective requires more analysis, to understand what it is that different employee segments truly value.

In a downturn, many employees, both young and experienced, are likely to be concerned about survival in the company, and factors such as job security become an important consideration. In different times, younger employees also value aspects such as exposure to senior management and new and diverse assignments; there may be others who value steady and sustained benefits.

A total rewards package should factor in these various needs. We have found that rigorous data collection on what different categories of employee's value and establishing linkage with outcomes such as retention, faster progression using techniques such as conjoint analysis is a valuable way of getting an efficient total rewards strategy.

Companies who invest in this process spend a lot of time in design of not only monetary incentives but the non-monetary ones too; this is also the reason that the companies that are the most preferred employers are not necessarily those that are aggressive on compensation with relation to the market.

The company's point of view and the employee's perspective need to be balanced with the cost of designing and delivering the programme. To cite an example of a company which was able to make a simple yet powerful adjustment to its total rewards strategy, take the case of one our global client who was struggling with employee costs in a downturn.

The company realised that it needed to understand its audience better than ever to motivate them to stay and see the company through its hard times. After rigorous study, they found that employees appreciated being allowed to choose those benefits that mattered the most to them and thus have a say in on how their benefit spends were allocated.

Younger employees were more interested in how their performance in difficult times would help them to climb the career ladder faster. After a redesign of the career progression system and a complete overhaul of the benefits system, the company was able to retain its critical employees and also managed to save an average of over half a million dollars a year.

Downside to variable pay?

Let us now consider another significant component of rewards packages: variable pay plans and how they play out in a downturn. Most companies have some sort of variable pay plan in place. Others are considering starting one. The dilemmas they face are therefore twofold: do they need to start one, and, how will the existing ones be perceived.

Many practitioners believe that variable pay plans should be introduced or reinforced when times are good so that employees see an immediate upside and experience the feel-good factor as an instant consequence.

Such companies are likely to be hesitant and shy away from introducing or increasing the target payout of such programmes. While there is some merit in this, practitioners of this view overlook the fact that a variable pay plan can actually provide a window of opportunity for upside to employees, in case there is a change in the business trend.

This is more so when companies are conservative in planning fixed pay hikes due to economic uncertainty; if subsequent profit pools are higher than projected, a variable pay plan can allow some channeling of that to employees.

So the verdict seems clear - variable pay plans do not lose their relevance in times of downturn; if anything they are even more meaningful. How they are communicated, however, is crucial to how they are perceived by employees.

In times of hyper growth and superlative business performance, the variable pay component was considered one that delivered or exceeded targeted levels of payout. Now, the concept and philosophy of "pay at risk" will perhaps be reinforced, and the true role of variable pay will become a part of pay design and analysis.

Compensation for an individual is a function of 3 Ps - the position occupied person specific premium (due to factors such as experience, knowledge, networks and so on) and performance.

In years of hyper growth, compensation among Indian companies grew significantly on account of the first 2 Ps; a downturn is a time to put the focus back on the 3rd P.

When long-term incentives unravel

Finally, what does a company do when some components of its rewards packages implode? For instance, what if long term incentives tied to equity have sunk in value? There are no easy answers here. Good governance requires that some of the risk and downside of equity-based pay is shared by executives, as the upside in good times is uncapped.

At the same time, a lot of equity pay is given with a strong retention objective in India, and lack of any retention hooks for its top talent is a risk that every company needs to manage.

The original objectives with which equity was granted need to be revisited, along with a redesign of equity strategy going forward. Appropriate equity vehicles - including full value vehicles as against options, whose prevalence has been reducing around the world - can be chosen depending on performance measures as well the need to retain people and bridge any gaps with the market.

Alignment through communication

Even though companies feel that they are reeling under multiple pressures, this can be a good time to bring some steadiness to rewards programmes. As in most communication exercises, transparency pays.

Through all this upheaval, it is simple, honest and transparent communication that will play a central role in ensuring that employees stay aligned and engaged with the company while companies make their limited compensation budgets count.

Padmaja Alaganandan is India business leader, human capital, Mercer Consulting (India), and Gangapriya Chakraverti is India business leader with Mercer's information product solutions division



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