As we head deeper into what’s shaping up to be an extremely unpredictable year, businesses of all sizes will certainly soon be taking a look at their compensation strategies to identify potential improvements.
The critical challenge of balancing immediate financial and employee engagement concerns will be felt by all organizations over the next several months or more. What steps can employers take to strengthen their compensation strategies in 2020, in both the short- and long-terms?
Let’s walk through a few ongoing changes to stay aware of in the world of compensation, plus immediate and long-term considerations to keep in mind as we continue to deal with the COVID-19 pandemic and its effects. Here’s what we’ll cover:
- The dynamic regulatory environment of 2020
- Ongoing compensation trends in 2020
- Immediate considerations for your organization
- Long-term considerations for your organization
We specialize in HR for nonprofits and compensation support for small and mid-sized organizations, so we’ve worked with plenty of inflexible budgets. Even when conditions get tight, there are always flexible and creative ways to make the most of your organization’s resources while still strengthening your ties with employees. Let’s get started.
2020’s Dynamic Regulatory Environment
One of the few constant priorities for all organizations should be compliance. While ongoing events have definitely shaken up the day-to-day activities of businesses across the country, regulatory compliance should never be allowed to fall by the wayside.
Consider these ongoing regulatory trends and developments:
- COVID-19 and labor regulations. With more workers going remote than ever before, remember that the same labor regulations still apply even when workers aren’t in-office. In addition, new ones are being added on what seems to be a daily basis. Stay on top of relevant regulatory and sector-specific developments as much as possible with Coronavirus resource roundups and notifications. For non-exempt remote workers, remember that overtime and break mandates still apply. Investing in an online time-tracking software may be the right move, as many nonprofits have already found.
- State and local regulations. In the past several years and continuing into the new decade, we’ve seen more US state governments empower themselves to enact new labor regulations. Minimum wage increases, overtime mandates, and salary history bans are common examples. The level of diversity from state to state (and even city to city) can make it difficult to understand how policies might translate between locales, so stay on top of your organization’s unique set of regulatory requirements.
- Federal developments. Looking at 2020 more generally, it’s clear that we’ll likely see a new burst of labor regulation activity regardless of which party controls Congress or the White House. Minimum wage changes are likely, as are more developments specifically related to the impact of the COVID-19 pandemic. Again, stay on top of relevant developments to keep your organization prepared to respond appropriately.
- Equity and gender discrimination. Compensation discrimination should continue to be a concern for all organizations going forward, as it continues to be a problem for women and other groups in the workforce. A December 2019 2nd Circuit Court of Appeals ruling (Lenzi v. Systemax, Inc.) has simplified previous legal barriers and made it easier for workers to pursue claims. While this development is certainly a positive one in the big picture, it does reinforce the need to proactively document your compensation practices to more easily avoid or defend discrimination charges down the line.
Even with major disruptions across the US and world economies, compliance should remain top of mind for HR professionals.
Ongoing Compensation Trends in 2020
Over the past several years, we’ve seen a number of compensation trends rise to prominence. They’ll certainly continue to be important into 2020, although some may need to be considered in new ways as we respond and adapt to the economic impacts of the pandemic.
In general, organizations of all sizes have begun putting more emphasis on bonuses and variable- and incentive-based compensation structures. Both short-term incentives and long-term incentives have grown significantly in popularity across sectors. This is for a number of reasons:
- Providing more bonuses to more employees or developing a more flexible compensation model ultimately saves more money than fixed salary increases.
- This flexible approach ultimately allows employers to allocate more towards competing for top talent in a tight labor market. Variable pay and incentives tend to be more fairly reflective of the skill sets and quick thinking of today’s workers.
- Long- and short-term incentive or variable models can be extremely effective at engaging and retaining talent and driving concrete results when designed and implemented well.
However, it’s important to note that many generic or hastily-designed variable and incentive compensation structures implemented in recent years are now beginning to fail. Ineffective compensation strategies quickly become untenable for organizations to maintain. Why do more generic incentive plans fail?
- Compensation strategies simply can’t be rushed or one-size-fits-all. Employee pay is typically a company’s single largest expense, so it deserves careful consideration.
- Ineffective incentive plans often tie their goals to changing employee behavior rather than driving concrete business outcomes related to the position’s real purpose.
- Overly-structured or stringent incentive plans can rob employees of the possibility of creative input, which puts a major drain on motivation and engagement. Targets or goals that read to employees as arbitrary or superficial will also be unlikely to drive results.
If your organization is weighing a change, first carefully consider whether incentives and variable plans are even appropriate choices for your unique context. In addition, these strategies likely won’t be well-suited to every area within your business.
For increasing retention and engagement in specific departments, though, they can be very successful when implemented well. Compensation trends gain steam for very valid reasons and deserve attention, but remember that it’s very rarely a good idea to make hasty decisions around compensation, even when the ultimate goal is to empower employees and save money.
Immediate Considerations for Your Organization
Here are a few thoughts around steps that organizations of all sizes might want to take in the context of the COVID-19 pandemic and its impacts on Total Rewards compensation:
- If your organization’s existing variable compensation program is or could potentially be heavily impacted by the Coronavirus pandemic, strongly consider suspending any quota-based plans. Temporarily shifting sales quotas tied to variable incentives to a more straightforward commission-based structure is a good example.
- For all incentive-based compensation programs, take a careful look at your goals and target outcomes. Can they still be reasonably achieved amid the disruptions we’re seeing? Staying inflexibly focused on what employees might view as a lost cause is a surefire way to demotivate them. Focus your attention on revenue-generating activities that can be worked on right now under the present conditions.
- Consider moving towards a rewards program that instantly rewards employees for extraordinary efforts and results, focusing on non-cash awards like gift cards.
- Be sure to review the WARN Act and related, applicable state regulations if layoffs become an unfortunate necessity for your organization.
One critical role of HR in the current situation should be to advocate for any necessary changes needed to maintain employee motivation. Of course, balancing immediate financial concerns is a major challenge, but remember that the long-term impact of losing team members due to frustration or disengagement can become extremely costly.
Long-Term Considerations for Your Organization
Looking ahead to the rest of the year and beyond, what steps can you take to strengthen your organization’s approach to compensation? Consider these strategies:
- “Future-proof” your compensation strategy by moving away from static pay grades towards more adaptable pay ranges. Investing in dedicated performance management software that includes compensation features might be a smart move for growing organizations over the coming year.
- Prioritize transparency. Taking a transparent approach to compensation is always a best practice for organizations of all sizes, but it’s especially important as we head into a turbulent new economic landscape. Reflective, communicative leadership that’s open to some randomness coupled with clear rationale behind pay decisions should be a winning combination.
- Frequent communication is particularly important around incentive compensation plans. Even if your typical workflows have gone remote or been otherwise disrupted, committing (ideally) to monthly and quarterly progress reviews is a smart move.
- Double down on your mission. If your business has concrete corporate social responsibility programs in place, don’t lose track of them this year! COVID-19 and its economic impacts will likely result in a surge of relief, outreach, and advocacy efforts from the nonprofit sector, itself struggling to regain footing. There will be plenty of opportunities to deepen your ties with the community, so you should take advantage of them when possible. Check out Double the Donation’s overview if your business is new to corporate philanthropy.
- For nonprofits, enact your mission internally. It’s more important than ever that your internal culture and operations reflect your mission and inform your relationships with employees. Strong communication, relationship-building, and internal goal-setting related to your mission can greatly strengthen your team through 2020.
Most importantly, keep all of your goals and strategies grounded and clear as we head deeper into an unpredictable year. This is especially important around compensation and implementing strategic changes.
For instance, variable and incentive-based compensation plans can be effective at boosting engagement and retention while also cutting some fixed costs from raises, but your organization must avoid treating these plans as if they were the primary source of employees’ direct compensation. A sense of stability must underlie any compensation changes you implement so that employees feel you’re as committed to them as you’re encouraging them to be committed to you.
In other words, overdoing or over-emphasizing incentive plans in order to completely cut annual raises (or directly cut salaries) will send the message that employees themselves are variable, disposable elements of your strategy. This will effectively poison your company’s retention and engagement, which should absolutely be avoided as the economy as a whole faces a number of unknowns over the coming year.
Getting a grip on the constantly-evolving compensation environment is always a challenge, but for many of us, it’s felt as though 2020 has thrown us a real curveball.
Staying on top of the regulatory landscape and carefully weighing your options when it comes to making changes to your larger compensation strategy are both smart moves now and down the line. Take immediate action as needed to protect your organization’s ability to engage and motivate employees. Then, take a big-picture view of 2020 to ensure you’re setting your organization up for stability and success.