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Managing Compensation in a Downturn

A Checklist for Decision-Makers

Ensure your actions will help you succeed when the economy grows again.


Throughout a business’s history, there will be economic downturns when their resolve to manage employee compensation is truly tested. There is no telling how certain challenges will manifest, and there is no “right way” to face them. However, the benefit of hindsight proves to be invaluable. Having walked through crises at various times with our clients, we have gathered our collective wisdom on what to do and what not to do during these trying times. There is no foolproof way to navigate troubled waters and come out unscathed, so we would like to share some insights that can make the process of managing employee compensation go as smoothly as possible.


1. Keep your compensation philosophy aligned with your mission, vision, and values
Your compensation philosophy is integral to your company’s culture. It tells your employees “the way we do things” and reflects the organization’s core beliefs. Stay consistent with those values, even when you must make difficult decisions. If not, you risk negatively affecting employee engagement and productivity. If you have worked to link pay and performance, then it probably will not make sense to suddenly implement pay freezes or reductions based on factors unrelated to performance.

2. Consider your overall plan
Take a long look at your rewards plans. Do they incentivize behaviors that are beneficial to your company today? Look for unintended consequences in these changing times, and work to get rid of them. Remember, the chain is only as strong as its weakest link, so whatever your company rewards, that’s what will get done. Understand what your business must achieve in today’s climate, and make sure your rewards plans are focused on those achievements.

3. Challenge assumptions
Reconsider the paradigms you have possibly taken for granted. For example, over years of working with market pricing data, the assumption has always been that pay rates rise. Sometimes quickly, sometimes slowly, but always up. Such assumptions may no longer hold true. As Dorothy once said, “I’ve got a feeling we’re not in Kansas anymore.”

4. Embrace change management
Organizations like yours have embraced the concepts underlying change management for almost every operational endeavor. When you make compensation decisions in a downturn, you should be sure to deploy the best change management has to offer. Start by fully identifying all the key stakeholders and remember your audience every step of the way. Plan the work and work the plan.

5. Understand your workforce
Different employee groups will respond differently to changes in compensation programs. If you have a mature workforce with several seniority levels, they may prefer reductions in base pay rather than losing their jobs. On the other hand, a younger workforce may focus more on the present value of cash compensation and be less forgiving of a base pay reduction. No one-size-fits-all approach is likely to be effective. It is important to understand what is relevant to your workforce.

6. Take the long view whenever possible
None of us have a crystal ball. We don’t know how long or severe the current economic downturn will last. But we do know that ROI on human capital is central to our companies’ ability to prosper. Studies show that the short-term benefits of reducing headcount are accompanied by problems whose difficulty becomes clear when the pendulum shifts and it’s time to re-staff. The cost and lost time of recruitment and training, the missing productivity, and the lost institutional knowledge can be expensive. That’s why it’s important to think long-term now, even as you make short-term decisions.

7. Know your market
Even a modest investment of time and resources in understanding your labor markets can bring significant dividends in this crunch time and beyond. Stay in touch with the pulse/trend of your local and industry competitors regarding pay practices. Not so that you can follow blindly, but because understanding your labor market enables you to act in your organization’s best interest.

8. Manage by facts
In a crisis, we are all tempted to make knee jerk reactions – decisions made without a full understanding of the context and potential impact of our actions. You can avoid both “paralysis by analysis” and overreaction by disciplining yourself to use the best data and employ, or even add to, your arsenal of analysis and modeling tools. You’ll get the best results if you work to understand the relationships between compensation reduction programs and your key business metrics.

9. Make lemonade
We’ve seen an increase in workforce layoffs and pay reductions in recent years. Indeed, there must have been a great deal of angst in those decisions. But, just as the “peanut butter spread” approach to pay increases doesn’t help a company’s performance, pay reductions won’t necessarily help either. Look for ways to use pay reductions the way you use pay increases – to differentiate activities and performance in ways that will improve results.

10. Share information
Even in good times, concerns about compensation are often overlooked. In tough times, when the things we need to talk about are difficult, there’s an even greater need for transparent communication. Craft a top-notch communications plan to go along with any new compensation program, and make sure it gets executed! It’s another chance to make lemonade out of lemons.