Dealing with a Zero-Pay Increase Salary Budget during a Recession

At a time of economic downturn, employees look to the company’s leaders and HR team to provide guidance and support to keep the business operational. During a recession, organisations should look to review their key policies and start to formalise their current practices in order to ease the level of uncertainty and lack of clarity regarding expectations.

As commented by many, New Zealand is facing a recession worse than the Global Financial Crisis. The impact has been significant for business and the job losses continue to mount every day. Periods of time will be very different in 2020/21 – the early and later stages of the year are likely to present vastly different landscapes and issues due to Covid-19.

What organisations do will largely be determined by the nature of the business, how it is funded and what the world and economy will look like when we settle into the new normal. And in the case of some organisations, decisions will not just consider what they can afford financially, but also what they can afford to be seen to be doing politically.

According to our Pandemic Response Pulse Surveys, as many as 18% of organsiations have cancelled their plans to pay out salary increases for 2020. With a further 33% of organisations waiting to decide if any increase will be awarded.  Are you facing a low or zero budget for the upcoming pay reviews for employees?

Organisations should ensure they are spending their money in areas where it will provide the most benefit. We outline how organisations should approach important remuneration decisions and key considerations in the decision making process.


Remuneration Principles

Sustainable remuneration management centers around key principles including, among others:

  1. Business-centric – Business needs are important: there must be a link between expenditure and the achievement of organisational objectives.
  2. Added value (return on investment) – No employee should be receiving more in relation to the contribution they are making to organisational outcomes.
  3. Affordability – Generally good performance reaps rewards. However, this is always subject to the ability to pay.

Top eight steps to deal with remuneration during a recession

Given the context and the principles, we recommend the following steps in remuneration planning for the recession. These suggested actions worked well during the global financial crisis and are equally important and relevant today:

  1. Strongly advocate against across-the-board increases – spend any budget wisely on individuals most important to the business
  2. Reinforce the need to pay for performance – focus on your top performers and ensure your incentive plan encourages the right behaviours
  3. Advocate frugality referencing current economic realities
  4. Create a special budget pool – use it in an agile way over the year, for spot bonuses, retention, investment in employee development
  5. Keep on developing your high performers/top talent
  6. Develop a non-monetary reward program to recognise employees’ achievements
  7. Keep equitable practices at front of mind – use job sizing and market data
  8. Keep up with coaching and performance feedback.  Connection with employees is paramount for employee engagement

What else?

There are several areas that organisations should consider to ensure that the remuneration approach is fit for purpose and aligns with organizational goals whilst in a recession.

  • Keep the Market in Sight: Market data is collected annually and depending on the nature of the business and the policy of the organisation, the data you use may include data from organisations which have not been adversely affected by the recession/pandemic. Unless you change policy, you need to keep that data in mind so that your chosen market does not get too far over the horizon, and the process of clawing-back lost ground does not become financially and/or politically untenable.
  • Review Incentive Schemes: that are impacted by the inability to conduct business in affected regions and communicate to employees how this will be managed. Evaluate any potential impact to short-term incentive plans if there is a business disruption and determine strategy for managing any adjustments.
  • Align the response to your organisations values and strategy: Non-monetary rewards and recognition are always a valuable tool but come in to their own in these circumstances. The effectiveness of any reward obviously depends on its fit with the organisation’s situation and strategy, and the needs and wants of your workforce.
  • Invest in Personal Development: Establish a budget for learning & development if possible. Redeploy effort through stretch assignments and responsibility for projects. Research suggests that the development component of rewards can significantly affect employee engagement and performance.
  • Enable more Autonomy: It has been seen that more responsibility and freedom to get on with the job is a great retention tool and motivator for most staff. Organisations will need to provide support for managers to enable this to happen.
  • Promote Flexible Work: There is an opportunity to provide flexible work practices and continue with the learnings through lockdown. Be open to how employees can work around family and personal circumstances. Employees will often appreciate it over and above other benefits.
  • Communicate, Communicate, Communicate: When you define and communicate rewards, include all the components that represent financial benefit to employees, and also communicate the connection between the organisation’s objectives, how everyone contributes to that, and how and why they are rewarded.
  • Review: Re-consider current benefits/non-monetary rewards: What aspects are critically important to your ability to attract, retain and motivate your people? What current rewards practices work well? Could the rewards be differentiated based on performance?
  • Act Fast: Do not delay when making remuneration decisions.  Prioritize your actions now.  Focus on employees that really make a difference and how to retain them with little or no budget. Make sure they know how much you value them.

A recession requires a “Business Centric” approach to remuneration management, particularly when business survival is paramount. The need to attract, retain and engage the right employees is more important than ever.  You want to come out of this having the workforce capability to recover quickly. For organisations to get full value out of their remuneration budget, they must find the right balance between the business needs of the employer, the personal needs of employees, and the tight cost constraints that some organisations are now facing.
Authors: Michelle Read, Southern Consulting Manager and Michelle Gapes, Northern Consulting Manager  


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