Compensation Challenges in 2012: Finding the Right Mix

Most companies know what they want to achieve with their compensation programs. They want to build, motivate and retain a strong, innovative and productive workforce. The question is, what mix of pay will help the company to achieve that goal?

This question is not a new one. Companies have always struggled to hit the sweet spot when it comes to employee pay. They want to dedicate enough money to motivate desired results without paying too much or, worse, motivating the wrong results.

However, as companies move away from the economic turmoil of the last few years and further into a recovering economy, they need to refocus on their compensation choices and mix. Moreover, CFOs need to consider how employees view the company's overall value proposition—that is, everything of value the company provides to employees, including nonfinancial rewards.

Differentiate

Not all companies are willing or able to increase their salary and incentive budgets, so they need to make sure they allocate those rewards in ways that clearly differentiate among all levels of performance. Even those companies that can increase salary and incentive budgets should emphasize this type of differentiation.

Jason Adwin of Sibson Consulting Group advises companies with limited budgets to provide salary increases only for employees in critical jobs, the highest performers, or any other important employee segment. Another option is to carve out a portion of the salary and incentive budget and allocate that amount specifically to the company's highest performers. "This ensures a premium investment is made in those few employees who truly create value," says Adwin. See more of Adwin's thoughts here.

If taking this approach creates a gap between rewards for high performers and lower performers, your company would not be alone. In its own predictions for 2012 compensation practices, consulting firm Mercer expects the growing rewards gap between high- and low-performing employees to continue. In fact, Mercer recommends that companies consider implementing "a segmented rewards strategy by identifying employee performance drivers across job families, job levels, business units, geographies and performance groups to determine where to place limited compensation dollars."

Recognize that things can change.

If companies learned one thing from the downturn, it is that budgets, particularly salary budgets, are not set in stone. Although the U.S. economy looks to be on the road to recovery, any number of developments and events could derail those gains. When things turned sour in 2008 and 2009, companies slashed their salary and incentive budgets. Should the economy take a wrong turn going forward, the salary and incentive budget could once again be on the chopping block.

If this turns out to be necessary, CFOs must work carefully with HR to ensure that employees understand the reasons for the cuts and what needs to happen for things to return to normal. Employees have already suffered through a major recession and tended to stay put because of a poor job market. However, they may not be so patient to wait out another downturn, particularly those who are your best and brightest.

Next time, we will look more closely at the employee value proposition and its role in motivating employees.