Human Resources: Big Pay Predictions for 2003

Pay budget cuts in 2002? Pay cuts and hiring freezes partnered with lay offs to make 2002 less than fun for the human resource professional. We are on pay roller coaster and have been for about five years. First, we find that talent is scarce and we must design pay accordingly. Then, we find an excess of talent when business gets slow.

First people are an organization´s most important asset and then the same people are in excess supply. This has caused dreadful wrenching of the pay systems of many organizations. And most important, has created distrust in the eyes of employees. Often creating an insurmountable challenge to organization leaders trying to regain workforce support.

New Opportunities?
So, what´s in store for 2003? Discussions with human resource leaders concerned about pay management suggest that some rocky times may be ahead and that this year will create opportunities for agility and flexibility ad the year unfolds.

Business Improvement in Second Half: Organizations are predicting a turnaround in the second half of 2003-many think it has already begun. If this is the case, (and may think it is a huge ´if´) budgets for pay will assume a recessionary mode but organizations will need to focus on workforce growth that some believe will be rapid. So a number of organizations are predicting they will need to revisit their pay adjustment budgets mid-year and make them more generous. But they think income will support these changes and it will be a ´positive surprise´ after all.

Scarce Talent Pressures Multiply: Organizations are concerned that a selective scarce talent situation that is already underway will magnify in 2003. And many organizations that did pay ´freezing´ and ´pay cutting´ will have trouble getting these people on board as quickly and in as many numbers as they will hope for. Some businesses that cut scarce talent into the ´muscle´ during the last few years are concerned about their ability to regain a reputation for being an ´employee focused´ company.

Stock Value in Rebound: If you haven´t notices, the stock price of many organizations is increasing from the lows of only a few months ago. So while many options remain ´under water´ and may never see ´daylight´ again, company value is growing. And this means the opportunity for granting new options that have the potential of providing economic value to the recipient. But many 401-K plans are still not what employees expected and options may be a challenge for the short run. But the upside potential is significant if trust can be regained.

Measures and Goals Updated: Organizations that missed goals are able to restate them and regain traction on incentives linked to these measures. In many instances these goals were tied to incentive plans that failed to pay off in the last few years. Where a company and its employees count on some element of incentive pay out to provide competitive total cash compensation, the credibility of incentives based on business forecasting is critical in the next performance period.

More Manager Pay Budget Accountability:As the cost of people becomes an increasingly large element of total opportunity cost for an organization, responsibility for ´ROI on pay budgets´ is getting attention. And the outcome is more managers are getting the message to achieve goals for which they are accountable for the compensation budget they are allocated for the performance period. And this means a manager must know what is required to get the most from dollars spent on pay.

Alternative Solutions to Explore
Some of these challenges are new to pay and reward management. Others are ´old friends´ that are being revisited in perhaps new ways. Here´s some ideas we believe may help your organization address them more fruitfully:

Business Improvement in Second Half: Most organizations try to stick with a pay and reward plan for an entire fiscal year. This may not be possible going forward. Pay and reward planning has grown ´defensive´ over the last two years. This is after 6 plus years of ´full speed ahead´ pay management that was agile and responsive to change. You are going to need to be alert to changes in business Competitive practice for the most important people-those you retained during any downturn will change. And it is always easier to keep people before they are heading to the door than as they are on the way out.

Scarce Talent Pressures Multiply: Certain skills will become increasingly scarce. Many engineering, scientific, nursing, computer science, and financial skills are already in short supply. And in many instances these are the people who hold the core competency of your organization. It means making sure you allocate sufficient pay and rewards to skills that are most rapidly increasing in market value. This means unequal treatment as it relates to employees in scarce skill jobs as compared to those where the hiring pressures are not yet as great. For example more of any available pay budget for people with scarce skills.

Stock Value in Rebound: This is a ´blessing´ and a ´curse´. A blessing because organizations have considerable upside opportunity. Making up for lost appreciation and the company rebounds is critical to employee pocketbooks. So it is clearly a time for more options in the hands of those your organization needs going forward. You are going to have to educate employees on the ´ups´ and ´downs´ of stock price if you haven´t before. And you need to educate them on the reality that options are important to sharing in the future of your enterprise. It is not going to be an easy sell right now but equity will provide huge appreciation opportunities in the next decade-critical to young and growing workforces.

Measures and Goals Updated: Time to reforecast goals. It your performance is better than expected and your incentives pay out above what is normal due to pleasant surprises in 2003, you need to chalk that up to the realities of missing and making goals and the challenges of setting goals clearly and accurately. But take care for 2004 so you do not over-stretch and set goals that are not reasonably achievable. Employees in variable pay plans are judging the reality of these plans based on how achievable the measures and goals they have are.

More Manager Pay Budget Accountability: No more ´I would give you more but HR wouldn´t let me". So you need to prepare your managers for a situation where they are going to need to identify their top people and ensure they get the share in any pay budget dollars they need to keep focused on adding value to your business. And managers are going to need to really use the performance management tool to do this. If they only have enough pay dollars for 10% or 20% of their employees, they must manage the dollars so they get to the ones that are most important to the business.

Pay Business Not As Usual
Every time pay and rewards are subjected to heavy wrenching, new opportunities and choices are available. We are likely on an important threshold that will let our employees judge our readiness for effective pay management in the next five years. Many organizations lost their momentum with fads like ´best place to work´ or other initiatives they could not sustain in both good times and bad. We are sure you have other ideas and tips to share. Maybe you can send them to HR.com to supplement the few we provided.