Industry Week Magazine’s email notification service just announced that India’s economy grew at a 7.9% rate shattering all forecasts while the manufacturing segment of that economy grew at an even greater 9.2% rate. Noting that India is the third largest Asian economy the authors suggest that we are approaching the end of the recession. Another article reported that steel imports were up 29% for October, another positive sign.

I find this as great news but also see it as a two edged sword. Many of you have had to take decisive human resource actions to stay in the game as the recession deepened. Some, I know, froze base salaries, others eliminated bonuses, and some others were forced to actually reduce salaries for the exempt employees and the work week schedule for hourly workers.

According to data compiled by several consulting giants and various professional associations these pay actions, although critical to survival, have resulted in significant declines in the employees EVP (Economic Value Proposition) or how they feel about their current employer and the employment relationship. The surveys also report that about 40% to 50% of current employees intend to actively seek a new position when the economy rebounds.

This suggests to me that we have a couple of options to consider as the economy turns the corner and we return to a more normal and profitable environment. The most obvious two are (a) reinstate the base salaries and bonuses that were in effect prior to the downturn and (b) do nothing to salaries and employment levels. Let’s look at these in a little more detail.

First the option of reinstating previous salary and benefit levels will provide the appearance of fairness and concern for the employee’s well being. This approach obviously increases costs immediately but may actually be cost effective if it keeps one or more employees from leaving which would result in a recruiting cost of 4 or more times the employee’s salary. Conversely, we may simply be continuing existing inequities in individual and group pay levels

The second option of doing nothing also has some merit and problems. As a wide variety of companies were forced to take dramatic salary action it appears that the market price for many positions is actually less than the rate reported in early 2008 surveys. So, in 2008 to be competitive in the market for talent one might have to pay X, but today to maintain that same level of competitiveness you only have to pay X minus 10 to 20 percent.

You might say that this simply supports the “fact” that we don’t need to take any positive salary action because the employee won’t be able to find another position that pays more than they are currently making at the reduced rate. While that may be true, there is also the matter of the employee’s perception of a fair exchange of his or her labor for the compensation offered. Said another way, if the employee feels like they are being undercompensated they may (probably will) reduce their output so that it equals their perception of the value of the compensation being offered. And I defy you to prove that an employee is not working as fast nor as efficiently as they can – it just won’t happen.

Is there a better alternative? I believe there is and it is somewhere in the middle of the two previously discussed options. I think we should take this change as an opportunity to maximize the effectiveness and appropriateness of our compensation plan and in turn use the study as an opportunity to communicate to our employees that we are concerned about their well being and that we are taking proactive steps to insure that they are compensated fairly and competitively.

What should this entail? Basically it should include both an internal and external analysis of our employees pay. Internally, a regression analysis of current pay practices will highlight anomalies that have been missed or overlooked in the past when increases were granted annually and salary confidentially was the norm.

As an aside, the Boomers and GenX employees historically followed the company policy that “salaries are confidential and (as many companies had in their policy manual) discussion of your pay with another employee may be cause for disciplinary action up to and including dismissal.” Today’s Millennial or GenY employees do not believe or live by that policy and it is far more common for employees to openly discuss their pay levels and to search the web for competitive market data.

This new openness creates both opportunities and pitfalls. If we have our compensation plans implemented effectively the employee grapevine just creates positive perceptions and enhances the satisfaction and loyalty of our employees. Conversely, if we know we have inequities, and choose to try to hide them, we really open ourselves to criticism and negative attitudes and employee reactions. Finally, I personally never felt comfortable that we would be able to actually enforce a confidentially policy if an employee decided to tell a co-worker what they were being paid as long as the first amendment still exists.

So, with the regression analysis completed the jobs and associated individuals whose pay is out of line with the norm can be further analyzed and, where appropriate, adjustments can be calculated.

Once we are comfortable with our internal equity, assuming the adjustments will be implemented, we should then concentrate on the external market for our benchmark jobs. How competitive are we with the market – how competitive do we want to be – how do our pay levels sync with our strategic and operational plans – how do our compensation and human resource programs support our vision and mission?

After factoring the external market data into our analysis we can then finalize any pay adjustments that we have determined are necessary and will improve operations.

Finally, there is the matter of communications. Individuals who will be getting pay adjustments should be told how much they will be receiving and the fact that the increase is, in part, due to their above average performance and our analysis of market conditions. After these individual adjustments are personally communicated by the immediate supervisor we should take the time to provide all of our employees with an overview of the analysis that was conducted, the findings from the analysis, and any actions that will be implemented as the result of our review.

Taking the time and exerting the effort to conduct a thorough analysis of our current compensation program and to then communicate the results to our employees will generate positive results. First, there will be the matter of employee loyalty and commitment that will grow because the employees will know that you are concerned about their well being. Second, you will minimize the number of employees who look for new positions for what they perceive as a better working arrangement. Then there will be the increased productivity if the employee is not “wasting” time looking for a new position. And finally, you won’t suffer the recruiting costs associated with replacing an employee.

So, the turnaround offers an opportunity to maximize your employees which in turn will maximize your profits. Enjoy the improvement.


© Copyright 2009 – J.E. Mittler & Company. All rights reserved.