Should the Economy Drive Compensation Strategy?

Should the Economy Drive Compensation Strategy?

At Talent Economy, Lauren Dixon discusses which broad indicators of economic health should influence organizations’ compensation choices:

Economic indicators help leaders get a sense of the health of the overall economy, but when it comes to setting compensation, experts say using these figures as a benchmark remains perilous. “A growing economy should drive down unemployment and support wage growth, which implies that a CEO should be vigilant about the need to compete for talent via compensation packages,” said Josh Wright, chief economist at iCIMS, an HR software company in Matawan, New Jersey. …

That isn’t to say executives shouldn’t follow certain indicators to pair with a more focused compensation analysis strategy. According to iCIMS’ Wright, the major macroeconomic indicators executives should look at when considering their companies’ compensation strategies include:

  • Costs of living.
  • Price pressures of consumers.
  • Local housing markets.
  • Consumer Price Index.
  • Personal Consumption Expenditures.

This brings to mind the preliminary discussion taking place in some executive circles about eliminating regular, annual salary increases and tying individual increases specifically to clear step changes in employees’ skills that can be assessed. For businesses, the argument here is that we need to tie pay increases more clearly to worker outcomes instead of an abstract trigger like the CPI or trade agreements that may affect our workforce differently than others. That way, rising talent will get the raises they deserve, regardless of economic conditions.

On the other hand, there’s a huge signal value that comes with everyone getting raises, and at the same time. So converting an annual wave of pay raises, which employees can predict and budget for, to an individual trickle of constant raises that are unpredictable from an employee perspective, is not for the faint of heart, nor is it yet proven to be a good strategy.

Additionally, if we’re really talking about how well the business is likely to do over the next 12 months and what that means for compensation strategy, one indicator worth mentioning that is not listed here is employee outlook on the business. At a recent HR executive meeting, there was discussion about increasing the flexibility of long-term incentives like bonuses, stock options and restricted stock units. The primary goal of these strategies is to increase employee engagement by letting staff pick the mix of rewards that works best for them, but there are a couple of intriguing side effects of this approach that remain unexplored because the practice is relatively new and not widespread.

The aggregated view of the choices individuals make for their long-term compensation package can speak to a company’s risk tolerance, while changes in the trend from year to year can perhaps indicate whether the business will over- or under-perform in the coming year. For example, a move towards mostly restricted stock units instead of options may single a business slowdown and help businesses anticipate possible changes to salary increase pools.