Economic recovery leads to movement as companies resume hiring, make new investments and generally create new opportunities. For many companies, all of this activity can move their best and most promising employees with the most critical skills right out the door.
That's where the money comes in. Companies are finally upping their compensation budgets as the economy continues to recover. However, these companies would be well served to target those funds to where they are most needed.
"It is becoming more important for companies to consider how they can reward and retain their critical employees," says Laurie Bienstock, North America leader for rewards consulting at Towers Watson in San Francisco. "We are starting to see more pressure in certain pockets and employers need to think about how they are going to adjust their pay plans either across the board for everybody or by focusing on those pockets of at-risk employees."
Here are some ways to get the most bang for your compensation buck in this environment.
Allot funds carefully. Companies can fund a range of pay programs, including merit pay budgets that adjust base salaries and one-time or ongoing incentives. With limited funds, companies need to make careful choices about whether and to what extent to fund these plans.
Consider customized incentives. The beauty of incentives is their flexibility. If a company needs to retain a certain group of employees, achieve certain business results, or meet any other goal, a carefully designed and communicated incentive can help get them where they want to go.
Factor in the needs of the target employees. "Companies can develop different kinds of reward plans for different types of people," says Bienstock. Sales staffs have long had customized incentives because sales results are relatively easy to tie to revenue goals. Bienstock suggests that companies apply the same idea other parts of the organization with similar results. For example, technology companies can design incentives targeted to software engineers or design architects with measures based on new product development or programming milestones.
Consider the overall work environment. Not everyone is motivated solely by money. Many types of employees also need a work environment in which they can thrive. Therefore, "rewards need to be broader than just an incentive plan, such as flexible working arrangements or whatever else is important to that group of people," says Bienstock. "Find out why they are coming to work and what motivates them once you have them."
Differentiate high performance. Any successful reward program needs to differentiate among the performers. "Everyone should have the same opportunity but that does not mean everybody should get the same pay out," says Bienstock.
No matter what pay programs a company chooses, CFOs have a critical role to play in their design. Considering that employee compensation is the largest fixed cost for most companies, it makes sense for HR and finance to team up to ensure the greatest possible return on investment for these funds. The CFO can play a particularly important role when it comes to developing appropriate performance metrics and selling the need to shift compensation dollars to various types of pay programs based on identified needs.