How to Manage Compensation in Challenging Times?

When maneuvering a tough economy, human capital usually takes the first hit. How can organisations manage compensation effectively when cost control is a critical issue?

How to Manage Compensation in Challenging Times?

20 May 2016 by  Ray Everett

The Middle East seems set for a rocky ride throughout 2016. There are numerous issues for management to think about when maneuvering a tough economy, and as human capital is often the largest expense, it’s usually the first thing firms look at when they need to control costs.

So, how can organisations manage compensation more effectively when cost control becomes an issue?

Manage compensation challenging times

Ask and answer these 4 questions:

1. Where does your organisation stand against market benchmarks?
Knowing where your firm is positioned in the market is a critical first step. For example, if your firm’s total compensation is benchmarked at the high end of the market against competitors, you have more room to maneuver. Moreover, understanding and revaluating your mix of pay (salary, allowances and incentives) is also useful. During uncertain times staff can often be happier with a larger salary and smaller incentive.

Other items to benchmark include assessing your grade pyramid and front to back office ratios. Does your organisation have more senior staff as a percentage of total staff or do you have a greater percentage of support staff than your competitors? Answering these questions will help you make rational, versus emotional, decisions.

2. Why not to freeze salaries?
A salary freeze will bring about an adverse impact on your staff’s motivation. Instead, be selective about salary increases—for instance, only giving them to junior staff and high performers in middle management.

Costs can, however, be cut down on allowances. For instance, housing allowances can be indexed to rents in the local market and medical, disability, and life insurance expenses can be reduced. In recent years, firms have also moved to one consolidated allowance, which is typically not based on family size.

3. How to incentivise creatively?
Refusing to pay bonuses, despite achieving financial KPIs, will not only result in firms losing their top talent, but also damage their reputation in the long term. Again, a more selective approach is advisable, however, management will have to be prepared to make very tough decisions and “zero out” poor and mediocre performers. Alternatively, there are more creative ways to incentivize staff. For example, long-term incentives can have real value as employees believe they can contribute to turning the company around.

4. Why worry about managing our compensation when there are no jobs out there?
If management and HR think this way about compensation; they probably exhibit the same mind-set around giving feedback to staff, training and development, and performance management.

Communication with management and staff from the top down is critical. Communication needs to be clear, honest and frequent, so that people understand why changes are happening and if there are possibly more changes to come. Failure to communicate formally and regularly will result in gossip and speculation, leaving employees feeling insecure, undervalued and disengaged.

A firm’s most valuable resource is its human capital and in times of difficulty, it is this very commodity that needs to be protected the most. We have highlighted areas of consideration for Boards, Management, and Human Resources to review and think holistically about to manage compensation spend and ensure this resource is protected in the best possible way in challenging times.

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If you need help with managing your organisation's compensation strategies in these challenging times, get in touch with us today.

Ray Everett

Ray Everett is CEO for Aon Hewitt Middle East & Africa, and leads the McLagan business across APAC and MEA. Ray assists firms in the design and implementation of their total compensation strategy, as well as annual and deferred/long-term compensation plans. His focus area is the Financial Services Industry, specifically Investment Banking, Investment Management and Private Equity. In addition to being an authority in executive compensation, Ray counsels Boards, CEOs, Remuneration Committees, government leaders and senior executives across Asia Pacific, Middle East & Africa.

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