COMPENSATION MANAGEMENT

IN THE RECOVERING ECONOMY

Driving Retention, Productivity and Growth

INTRODUCTION
The recent recession brought one of the most significant
reductions ever experienced in the U.S. workforce, along with
unparalleled cost cuts, including a slowdown in salary increases, a
record number of salary freezes and wholesale reductions in pay.
Although these extraordinary measures helped many
organizations survive this economic crisis, the consequences for
these actions are just beginning to be felt in three key areas:
Retention: Although Baby Boomer employees may need to
delay retirement to repair the recessions damage to their
stock portfolios, these employees are less likely to be a
retention risk. Younger employees are. According to a recent
Deloitte survey, only 37 percent of Generation X employees
and 44 percent of Generation Y employees plan to stick with
their current employer as the job market improves.1
Productivity: Unlike previous recessions, U.S. worker
productivity has soared during the current recession and
the outlook for sustaining this trend looks positive if
businesses can continue motivating employees.2 3
Growth: Prior to the recession, only 20 percent of
executives said more than three-fourths of employees in
their entire workforce understand the companys strategy
and what is needed to be successful in their industry.4
To drive the growth necessary to sustain the recovery,
businesses will need to take steps to align individual effort
with organizational goals.

Today, its urgent for businesses to adopt compensation practices

that will improve retention, productivity and growth during the
recovery. What are the best practices for an organization to act on
now to ensure that its compensation planning bolsters retention
and hiring as the economy improves? What tools are available
to them to act on those practices? This paper identifies five best
practices that enable companies to fine-tune their compensation
practices management to keep them competitive and poised for
growth.

1 Has the great recession changed the talent game? Deloitte. April 2010.
2 Global Economic Outlook, 1st Quarter 2010. Deloitte
3 Productivity and Costs, Fourth Quarter and Annual Averages 2009, Revised. U.S. Bureau of Labor Statistics. March 4, 2010.
http://www.bls.gov/news.release/prod2.nr0.htm
4 The High Performance Workforce Study 2006. Accenture.

2010 Plateau Systems Ltd.

NO. 1: LINK STRATEGIC BUSINESS GOALS

TO EMPLOYEES DAY-TO-DAY EFFORTS
Do your employees understand what your organizations most
crucial business goals are? If your employees dont understand how
strategic business goals are connected to their work every day,
your business performance may be suffering.
According to Bersin & Associates research, individual employees
should have defined performance measures, such as goals,
competencies and job accountabilities, that relate to revenue targets,
production targets and other key performance indicators from the
organizations business plan. Some goals should be specific to
an individual. Other goals sometimes called cascading goals
should be aligned with corporate or organizational objectives. This
approach recognizes individual needs while ensuring alignment and
accountability with organizational objectives.5
Prior to the recession, this connection was tenuous at best.
Accenture research from 2006 showed that just 20 percent of
executives surveyed said more than three-fourths of employees
in their entire workforce understand the companys strategy and
what is needed to be successful in their industry. After the layoffs
and cost cutting during the recession, employee engagement
has suffered. Nearly half (49 percent) of employees surveyed
by Deloitte in 2009 were considering leaving their job after the
recession. When asked about the most significant factor that would
cause them to change jobs after the recession, 36 percent of
employees said lack of compensation increases.6
Although many business leaders typically believe that compensation
ranks lower on the list of reasons to leave an organization than
supervisor, company and work environment, Deloitte research
shows that compensation is still a main motivator for employees
in the wake of the recession a finding that is consistent across
generations. 7 Compensation isnt the only factor in encouraging
retention, but for many employees, compensation is still often the
clearest and most definitive message an employee will get from
their organization that they are valued.

At the same time that employees are becoming more interested

in financial incentives, more organizations are also interested in
linking business goals to employee performance through incentivebased compensation. As the economy moves from recession to
recovery, companies are realizing its a great time to reevaluate
their compensation practices. Organizations are laser focused on
managing their fixed costs, and variable pay offers the flexibility to
pay based on the financial success of the company.
As compensation consultant and HR thought leader Ann Bares
wrote at the end of last year, the recession has brought about a
sea change in the world of compensation fixed salaries and merit
increases are on the way out, variable and incentive compensation
is increasing. As of 2009, 59 percent of organizations in the U.S.
have enterprisewide variable compensation based on business
results.8 And these efforts correlate with performance Watson
Wyatt research shows that high-performing companies (measured
as those with greater profit over time) have 20 percent more
employees with differentiated compensation of 1.5 times or greater
over their peers.9
However, the door swings both ways on this change. Employees
may welcome pay for performance because it is measured against
quantifiable data and not a supervisors subjective opinion, but
employees need ongoing visibility into their progress. Bares writes:
Employees whose pay is increasingly tied to the success or failure
of projects, business units and even entire organizations will
increasingly demand the information and help they need to track
and understand that performance.10
Employees need to feel that they can affect their destinies. That
alone can make the difference between a 5 percent attrition rate
and a 25 percent attrition rate. Putting compensation tools in the
hands of employees makes them more effective and makes them
feel more empowered.
5 Bersin & Associates. 2009 Talent Management Factbook.
6 Managing talent in a turbulent economy: Keeping your team intact. Deloitte. September 2009.
7 Ibid.
8 Bersin & Associates. Enterprise Compensation Solutions. 2009
9 Ibid.
10 Bares, Ann. A Changing Game, and a Door That Swings Both Ways. Compensation Force Blog. December 16, 2009.
http://compforce.typepad.com/compensation_force/2009/12/the-changing-game-and-a-door-that-swings-both-ways.html

Figure 1: Respondents by generation: Most effective retention initiatives

Employee group

No. 1 Ranking

No. 2 Ranking

Generation Y (under 30)

Additional Compensation (49%)

Additional bonuses or
financial Incentives (49%)

Generation X (30-44)

Additional bonuses or
financial incentives (48%)

Additional compensation (44%)

Baby Boomers (45-64)

Strong leadership (41%)

Additional bonuses or
financial incentives (40%)

Veterans (65+)

Additional compensation (43%)

Additional benefits
(i.e. health and pensions) (31%)

2010 Plateau Systems Ltd.

NO. 2: USE INCENTIVE PAY TO DRIVE RETENTION AND

INNOVATION
In the post-recession economy, growth will require innovation.
Deloitte research shows that the vast majority of executives
understand that innovation is either very important or important
to their company now (84 percent) and will be a year after the
recession ends (82 percent) and three years into the future (85
percent).11
Encouraging innovation will require effective compensation
strategies that include both short- and long-term incentives. From
a compensation marketplace perspective, short-term incentives
are more retrospective and long-term incentives are more
forward-looking. Short-term incentives reward performance
that influences the companys financials for that year. Long-term
incentives focus on equitable rewards that typically will vest over
time stock options, stock grants and deferred compensation.
As the economy moves forward into recovery, both are important
tools to keep workers engaged.
Engaging workers and driving innovation is top of mind for
executives today. An overwhelming majority of executives (88
percent) fear they will not have the necessary talent to lead their
innovation programs after the recession. Nearly half (48 percent)
of these executives said bonuses or other financial incentives tied
to innovation are essential to retain key employees.12 Employees
seem to agree that compensation can drive retention. A recent
survey showed that additional compensation and additional
bonuses were the top two reasons for employees to stay with
their current organization and the lack of additional compensation
and bonuses were two of the top three reasons for leaving their
current organization.13

Amy Dines, compensation product manager for Plateau Systems,

points out that bonuses that are awarded at management
discretion after a successful year are far less effective than
incentive programs based on performance objectives that
employees can track throughout the year. We are seeing more
short-term variable pay programs increase and many longer-term
stock-based programs shrinking, she said. Theres more of a
sense that not everyone values equity and maybe cash really is
king.
Organizations are also aware that a compensation program needs
enough flexibility to fine-tune base pay, incentive pay, bonuses,
stock grants and other compensation elements in a way that
motivates different employee groups.
At the lower levels of the organization, there should be more
emphasis on individual performance and at the higher end,
more emphasis on achieving corporate goals. If you take an
administrative assistant and offer an incentive based on revenue,
that may not be very motivating because they may feel they have
little control over revenue. However, if you tell a person that 75
percent of their bonus is based on individual contributions and
25 percent based on revenue, thats a well-designed plan that
balances everyones needs, Dines said.

Figure 2: Factors that would cause surveyed employees to leave or stay with their organization
Reasons To Go

Reasons To Stay

Additional compensation 27%

Additional compensation 43%

Job advancement/career progress 27%

Additional bonuses 41%

Additional bonuses 23%

Leadership strength/trust 28%

Leadership strength/trust 22%

Job advancement/career progress 28%

Support/recognition from supervisors

or managers 20%

Support/recognition from supervisors

or managers 25%

SOURCE: Has the great recession changed the talent game? April 2010. Deloitte.

11 Managing talent in a turbulent economy: Leaning into the recovery. Deloitte. November 2009.
12 Ibid.
13 Has the great recession changed the talent game? Deloitte. April 2010.

2010 Plateau Systems Ltd.

NO. 3: BE AWARE OF WHAT THE MARKET WILL BEAR

What should you be paying employees today? Businesses need a
way to understand what a position is worth especially because
the recession may have changed what the market will bear. People
with key skills will always be in demand. Market pricing is even
more important when the market is shifting and you are trying to
attract and retain key employees. If you really want a candidate
to accept a job and not just game your offer against another
employer, you need to know what the market will pay for that
position.
Past recoveries have produced a flurry of salary adjustment
activity a frantic pattern of catch up as the labor market
turned, recruiting activity and market pay levels picked up steam,
and organizations scrambled to keep their salaries competitive.
That appears to be the case with this recession; in a recent study
from Buck Consultants, 30 percent of the 180 U.S. employers
surveyed indicated that they plan to use market-based salary
adjustments to retain their top performers.14

Compensation management technology allows businesses to

have insight into how much a position should be paid based on job
title, experience and location. These tools also offer visibility into
base compensation and incentive compensation levels. Where you
dont want to be is having 10-year veterans seeing that they can
easily get a 20 percent increase to go to work for a competitor.
Without the automation to support more complex and variable
salary structures with real-time visibility into market data, many
organizations may find themselves severely hindered as they try
to retain high-performing employees.
With compensation, you really dont want an employee to come
to a company because of money or leave because of money. You
kind of want to take compensation out of the picture so they dont
think about it, but you want to avoid paying too much.

Multiple salary structures allow organizations to have the

flexibility to respond to changing market conditions and ensure
that pay levels for groups of jobs are competitive externally and
equitable internally. Access to data allows businesses to make
informed decisions and can help managers support or deny
raises. Figure 3 shows that 43 percent of organizations surveyed
offer a single salary structure. Also, few of the organizations offer
salary structures that vary based on job function or location.15

Figure 3: Single vs. multiple salary structures

Single
Structure

Multiple
Structures
Differing By
Job Function

Multiple
Structures
Differing By
Location

Multiple
Structures
Differing By
Job & Location

43%

21%

19%

15%

15%

Executives

58%

18%

12%

8%

8%

Directors/managers

43%

21%

19%

15%

15%

Professional

38%

22%

20%

18%

18%

Hourly nonexempt

34%

21%

24%

18%

18%

All Companies

Other

Job Level

Source: 2009 Culpepper Pay Practices Survey

http://www.shrm.org/hrdisciplines/compensation/articles/pages/salaryrange.aspx

14 Bares, Ann. Will Recovery Herald a Wave of Market Salary Adjustments? Compensation Caf Blog. March 26, 2010.
http://compforce.typepad.com/compensation_cafe/2010/03/will-recovery-herald-a-wave-of-market-salary-adjustments.html
15 Salary Range Structure Practices. Culpepper and Associates. SHRM.org. Nov. 16, 2009. http://www.shrm.org/hrdisciplines/compensation/articles/pages/salaryrange.aspx

2010 Plateau Systems Ltd.

NO. 4: EQUIPPING MANAGERS WITH TOOLS FOR

SUCCESS
Line managers need to be engaged in the process of driving
retention, productivity and growth. The front line for any
performance and compensation practice is the manager, but they
need the right tools to support conversations about compensation.
However, too many organizations shut managers out of the
process, giving them little input other than perhaps to hand out
modest merit increases. Managers need to feel empowered to
make decisions and feel that their input adds value to the process.
Compensation management technology provides managers with
tools that help them manage and administer compensation and
incentivize high performance. Employee performance should be
measured against quantifiable criteria; objective data reduces
misunderstandings (and compliance risks). Compensation
management technology engages managers in the process and
benefits them in other ways, including:
Increasing

manager visibility to their direct reports at every

level
Providing managers with reports that offer the necessary
information to create competitive plans and monitor
business impact
Enabling adherence to established budgets
Reducing human error on manual entries that can be as high
as 30 percent
Allowing manager recommendations that can be governed
by software to remain within guidelines
Uploading final approved pay changes automatically to the
HRIS
Saving hundreds of work hours each review cycle, allowing
managers to spend more time doing revenue-generating work
Shortening the window from performance evaluation to
paycheck impact

Eliminating paper helps managers focus on having meaningful

interaction with the employee, said Kevin Simpson, compensation
project manager for Plateau Systems. The employee needs to
feel a sense of dialogue and good dialogue with the manager
so they can build a relationship. Its hard to build a relationship
if the employee feels the manager has no real authority to make
decisions. All the tools are nice to have, but the dialogue is the
prerequisite.

NO. 5: TIE COMPENSATION PRACTICES TO

PERFORMANCE, SUCCESSION AND LEARNING
Compensation cannot exist in a vacuum. Instead, it must be
integrated across the talent management spectrum. However,
Bersin & Associates estimates that more than 90 percent of
performance and talent management software systems are not
integrated with a compensation system.16 Without integration with
performance management, succession management and learning,
paying for performance is not possible.17
The value of integration is also one that an organization can see
on its bottom line. Companies with integrated talent management
experience revenues per employee that are 26 percent higher
than companies without an integrated strategy.18
Performance:

Employees are hungry for personal

development. Creating individual goals that are aligned
with business strategy is only the first step. Performance
should also be aligned with a core set of competencies
and assessed on a regular basis.19 Employees must
clearly understand how their effort has an impact on the
organization and on their individual compensation. Top
performers must see a meaningful difference in their
compensation, and average performers must understand
how they can improve their performance and their
compensation.
Career & Succession: Succession needs to be a framework
for talent, and it isnt just for senior executives anymore.
Companies that want to thrive during the recovery need
to understand which critical positions drive their business
success today and which high-potential employees
could be tomorrows leaders. Businesses need to pay
these employees today, but they should also build career
paths that will increase contribution and compensation.
Organizations also need to build talent pools of these key
employees to sustain growth during the recovery.
Learning: Employees who fall short of performance goals
need the opportunity to learn the skills that allow them to
earn incentives. Integrated talent management makes it easy
for managers to assign training to address skills gaps or
areas where performance is falling short.

Global complexities
In a global organization, the compensation budget is highly
vulnerable to currency changes. Global corporations
often manage cash in different currencies and hedge the
risk of currency fluctuations. Compensation management
technology makes it far easier to manage multiple
currencies and establish country-specific processes and
practices that are sensitive to cultural issues.
(Source: Bersin & Associates. Enterprise Compensation Solutions. 2009)

16 Bersin & Associates. Enterprise Compensation Solutions. 2009

17 Ibid.
18 Bersin 2009 Talent Management Factbook.
19 Bersin & Associates. Enterprise Compensation Solutions. 2009

2010 Plateau Systems Ltd.

CONCLUSION
Businesses that want to be prepared for growth during the
recovery must take proactive steps now to build effective
compensation solutions that encourage retention, productivity
and growth. The old peanut butter approach of spreading
compensation increases evenly is a roadmap for employee
dissatisfaction, disengagement and poor business results.
Employees must understand that they can have an impact on
the success of the company and that if they are partners in the
success of the business, they will be compensated accordingly.
To build an effective compensation strategy for the recovery,
it is crucial for organizations to link strategic business goals to
employees day-to-day efforts to increase revenue and profit
during this time of transition. Also, incentive pay can drive
retention and innovation, which can create a work environment
that keeps employees engaged. Retention initiatives will also
receive a boost if an organization is aware of what the market will
bear for specific in-demand skill sets.
Above all, managers need the tools that reduce the amount of
paper involved in the process, minimize administrative headaches
and facilitate meaningful interaction with employees, Also,
compensation should be seamlessly integrated into the full range
of talent management initiatives for an organization, including
performance, succession and learning.
As the economy moves into recovery, the time is right to revisit
and reinforce your organizations approach to compensation
management. Choose your path wisely, and connect compensation
to results.

About Plateau Systems

Plateau Systems is the industrys premier provider of enterpriseclass SaaS talent management suites. Major global corporations
and government agencies, including General Electric, the U.S. Air
Force and Capital One Services are using Plateaus integrated
talent management solutions to improve productivity and facilitate
strategic workforce initiatives around learning, performance,
compensation and career and succession management. Plateau
is widely recognized throughout the industry for its commitment
to customer satisfaction, forward-thinking vision and for
consistently delivering best-in-class functionality. Founded in
1996, Plateau is headquartered in Arlington, Va., and has offices
across the United States, Europe and Asia Pacific. For more
information about Plateau, visit www.plateau.com.

2010 Plateau Systems Ltd.