The initial findings of the Global Pay Decisions Survey[1] suggest that the most urgent remuneration challenge that companies face is “insufficient budget for pay adjustments.” It is also reported that candidates are demanding unrealistically high salaries.
It seems like two sides of the same coin – a lack of funds to attract and retain talent, and candidates who want to move, but only for a better deal.
Cost control has become an almost universal business challenge. Companies are working hard to balance the books, resulting in low or no salary increase for most employees.
Sectors, including Tech, overpaid for talent during the 2021 bubble, and now they’re trying to slow-play further increases and bring expenses back into line. Low attrition rates mean that measures like not backfilling positions take a long time to ease pressure on the expense line. Some have suggested that previous overspending is what has fuelled the layoffs of the last 12 months. I don’t disagree, but I’d also suggest that overly optimistic sales forecasting has exacerbated the problem. Companies are unable to hit growth targets and sales/expense ratios are looking decidedly unhealthy.
Even if a company is still growing, moving more slowly than planned is bad news, because it worries shareholders and the stock market. Tech leaders tend to make very large proportion of their income via stock, so propping up the stock price is as important to them as it is to investors.
In most Service companies, including Tech, employee pay is the most significant expense, and it’s also the hardest to reduce. Shifting base salary from one person or group to another isn’t usually feasible. One situation where base pay can be refactored is when a person relocates to a lower-cost location, so we see companies investing in this effort despite employee backlash and bad press.
Companies with a well designed bonus component are in a slightly better position because expense reduces in line with lower sales performance. Some companies are likely feeling the pain of an expensive commissions bill due to bad sales plan design and over-indexing on base pay for sellers, which has long been a tactic to attract new hires.
And so in these uncertain times it feels logical, even compelling, that companies should take a conservative approach on pay increases. For many, that means delivering a small pay increase to everyone. For others, no salary increase cycle at all. The thinking goes that the fairest thing to do is be a little bit below everyone’s expectation. That way no one can complain (at least not more than anyone else).
But let’s consider a very common predicament companies face, specifically that within their organisation there is pay inequity. We can ask ourselves, in this scenario, is actually fair to give everyone the same percentage increase? And is it right to invest nothing at all to close pay gaps?
And what about the highest performers, those people who truly deliver business success? Oftentimes it’s simply too big of a risk to not give them a pay increase, because the cost of losing them is too high.
Within the current market dynamic, I observe that there is a strong opportunity for HR to lead with a more analytical approach, to help deliver targeted increases to close pay equity gaps, and to address real retention risk where it exists. We can also take the opportunity to strengthen performance measures, especially at the leadership level. After all, it’s hard to justify increasing pay (not to mention giving extra stocks) for the highest earners if business performance is below target.
Regarding external candidate expectations, it is advisable that companies strive to not bring in new employees at significantly higher compensation levels than their existing cohort. This would be a recipe for further inequity in the long term. The trend for pay equity and transparency is not going away, many jurisdictions are strengthening legislation, for example, here in Australia we see enhanced Workplace Gender Equality Agency (WGEA) reporting[2] requirements (which I blogged about in July).
Overall it’s an exciting time for People functions. The interconnectedness and complexity of the challenge shifts our work from nice-to-have to essential. In the past HR would think of projects (let’s say a talent development program) and justify the need for it to exist. Now HR needs to meet the business where they are and help them deliver results. People programs should trace their lineage directly back to business need.
So let’s look at the challenge at hand: insufficient budget for pay adjustments. I’ve narrowed down to four easy steps that can be implemented at most organisations. Customise the steps as needed. Bonus points if you use Excel or data analysis tools to make this a little easier for yourself:
- Review pay from the ground up
While meticulously reviewing each employee’s performance and compensation by level can be time-consuming, it’s a worthwhile effort. This approach ensures that no one is overlooked. Although budget requests will likely exceed available funds, careful evaluation, including justifications for any proposed increases can transform this into a high-value activity, enabling leaders to make budget trade-off decisions. Be sure to review base pay and commission for sales employees, and ensure that the pay mix is market aligned. Don’t use base pay to plug the gap if commissions fall short, any fixes should be systemic meaning you should review the sales plan and/or job assignment. - Review pay as an ongoing activity
Stay on top of market data all the time, not just during pay cycle season. This will enable you to respond quickly and decisively to employee resignations, plan ahead for promotions, and execute succession plans smoothly and on time. The understanding that you are always on top of pay data and actively reviewing competitiveness helps leaders act more confidently and make objective decisions. - Create a separate budget for promotions
Your budget should differentiate between annual salary increases, promotional raises, and other adjustments. Rewarding promotions with a competitive salary increase proactively supports career development programs and organisational goals, and offers greater efficiency compared to reactive, retention-focused raises. - Budget to close pay gaps
Addressing the gender pay gap is a legal requirement in many countries. While Employee Resource Groups (ERGs), events, sponsorship, scholarships, and similar are good investments, the one action that truly closes the gender pay gap is committing funds to actually close the gap. Even if the budget isn’t sufficient, separating it out and treating it as a priority is a good starting point.
Market uncertainty creates an opportunity to do things differently. It makes it easier to put fresh ideas and approaches on the table. Leaders tend to really listen to HR when we understand the business, and they rely on us to bring context to strategic decision making.
Within the People function, remuneration is not typically known as a hotbed of creative activity, which is a shame – because this is the area of HR that is most likely to grab the attention of leaders and enable us to play the roles of strategist and thinking-partner.
If you’re a business leader and you don’t see new ideas and strategy coming from your People organisation, invite your HR function to contribute. You might find that they have fantastic ideas, and are simply unsure whether they are welcome to play a strategic role.
The best solutions emerge when we get everyone together. Pull together a small group and workshop ideas that address real issues and constraints. This approach increases relevance and commitment in the execution phase. And if you’d like my help give me a shout, I’d love to join your conversations!
If you need support to plan and deliver any of the approaches discussed, please contact me for a free discovery conversation. All consulting engagements are customised to suit your specific needs.
For deeper insights into strategic pay decision-making, participate in our free anonymous survey. You’ll receive instant trending results, and it only takes 5 minutes. You can access the survey here https://forms.gle/KGbua4tUWT7bQEBm7
References:
[1] The Global Pay Decisions Survey forms.gle/KGbua4tUWT7bQEBm7
[2] Workplace Gender Equality Agency (WGEA) https://www.wgea.gov.au/about/our-legislation/Closing-the-gender-pay-gap-bill-2023