“Risk, Reward and Recession” A Criticaleye Article by Rob Burdett
17th September 2009
Managing risk has never been as important as it is now. Risk takes many forms and is faced in virtually all areas of a company’s operations, including its pay policies.
The FSA recently stated that pay policy “inconsistent with sound risk management” is one of the possible causes of the current economic crisis. And though the FSA’s concerns are largely focussed on the financial services industry, it is incumbent on all companies to ensure that remuneration arrangements do not encourage employees (particularly key executives) to, as the FSA would have it, “pursue risky policies... to the detriment of shareholders”.
Large organisations, however, should not address the issue of risk from this angle only. Businesses may also open themselves up to significant risks if they do not offer appropriate levels of potential upside to key talent at this critical point in time. It will be those companies that retain motivated executive and wider employee populations that will most successfully navigate their way through these very choppy economic waters. The key, therefore, is to secure this retention and incentivisation without a company exposing itself to other operational/financial risks.
Decreased base salaries
This presents a potential juggling act given the bad news companies are likely to be giving their workforces in the next pay round. Hewitt recently surveyed 400 European companies and with regard to base salaries found that current salary increase projections for 2009 have fallen substantially from the numbers that were contemplated before the onset of the economic crisis. For example, in the UK, projected increases are down from 4.2 per cent to 3.3 per cent. In Germany, they are down from 3.9 per cent to 3.2 per cent, France 3.7 per cent to 3.2 per cent, Netherlands 4 per cent to 3 per cent and Spain down from 4.4 per cent to 3.5 per cent. That said, these are all economies with a high exposure to the meltdown in the financial services industry. Expected salary increases in countries with less of an exposure to this sector – such as Sweden and Austria – have not reduced to the same extent (although pay levels in Sweden and other economies with a strong automotive industry bias might soon begin to suffer as well).
Interestingly, the analysis suggests that organisations are reducing their pay budgets even more significantly for middle management and above. For example, the percentage reduction in budgets for ‘top management’ in Western Europe is 24 per cent whereas for clerical and manual workers it is more like 16-18 per cent. There may be a couple of reasons for this. First, there may be more pay rigidity at lower levels due to collective bargaining or long-term pay deals which have incorporated inflation. Secondly, companies may feel that they have more alternatives to reward senior staff than simply base pay increases (eg, variable pay, stock or non-cash recognition).
Communicating pay matters
In an attempt to soften the blow of lower rates of increase, many companies are putting far more thought into how they communicate on pay matters with the workforce. For example, individual total compensation statements allow organisations to show that while pay increases may have reduced, each constituent element of pay has a value which adds up to a strong package.
Preparing to rebuild
Reduced salary increases is, however, only one of the many measures that companies are employing to weather the storm while attempting to achieve the primary objective of retaining key talent. In past recessions, companies were perhaps far too quick to wield the axe and reduce headcount dramatically.
This time round employers are taking steps, in some cases quite innovatively, to avoid (or at least limit) redundancies so they will not have to go through the costly process of rebuilding the workforce once the upturn comes. For example, in the German automotive industry, all the major players (including BMW and Daimler) are extending the length of their factory closures, albeit with employees still being paid. In Ireland, Irish Life and Permanent have offered workers paid sabbaticals.
Read the full article here (PDF).
© Criticaleye 2009