Don’t Make Difficult Times Worse With Bad Decisions
Many organizations are finding it difficult to support a fixed cost workforce when facing variable revenues.?The volatile economy has presented new challenges and for many that has included wildly varying revenues, high inflation and difficulties in retaining critical talent. Organizations like Amazon saw skyrocketing revenues when the pandemic arrived, and their biggest challenge was getting enough people to meet the demand with adequate supply. Organizations who could afford it raised their base pay levels significantly to attract the talent needed and the revenues supported the cost. As the pandemic subsided many of these employers were forced to shed staff. Part of the reason staffing levels must be reduced is that current revenues do not support the fixed cost levels those increases produced.
Historically there have been organizations who engaged in serial downsizing, flexing their current workforce costs to meet their current revenues. They supported that staffing pattern by claiming “the economy made me do it.” They sometimes recognized that treating people as their most disposable asset, rather than their most valuable asset, as many claimed, would damage their employer brand. But they were locked into that pattern by their own past decisions about what their value proposition would be.?
Workforce costs are impacted by staffing levels and what each individual employee costs. If variable revenues are an unavoidable reality, it makes economic sense to make individual costs as variable as possible, to avoid the necessity to rely on staffing levels alone to control costs. Yet in the U.S. the vast majority of employers have fixed cost value propositions.?
Employee benefits once granted are extremely difficult to withdraw. If an employee cannot count on stable health care coverage levels it complicates their life considerably. There is also a psychological barrier to taking a benefit away once granted. Since benefits typically cost 30 – 50% of base pay this is a considerable portion of workforce costs that is inflexible.
Direct compensation is totally in the form of base pay for many organizations, at least for the majority of their employees. In the private sector variable compensation is widely used for managerial and sales personnel, but less often for the remainder of employees. Public sector entities rarely use any form of variable pay, which means all direct pay is in the form of base pay (salary; wage). Once granted pay increases become the equivalent of a career annuity… base pay is extremely inflexible in a downward direction. Employees establish their standard of living based on what they believe they can count on as an income stream. They also believe their employer set the pay and created a social, if not legal contract.
Future increases may be uncertain but past base pay increases are considered untouchable, except in rare instances where demotions or the adoption of different roles is involved.?There are even instances where future increases are certain, at least for a time. Employees in bargaining units often have increases promised during the terms of the contract. In the public sector there has historically been a widespread use of systems that promise time-based automatic step progressions, which makes current and future base pay a career annuity. The U.S. federal government has used the GS system for decades and automatic pay progression has historically been common in other public sector entities. Since these systems do not consider employee performance, they often hinder retaining the best performers, who can go elsewhere and be rewarded for their contributions. As a result, their usage had diminished. About one-half of the federal employees have been taken out of the GS system and placed in “excepted service” positions. Over two-thirds of public utilities used fixed pay progression systems 15 years ago, but less than one-third do so today. Retaining those who contribute the most generally requires both acknowledgement and reward.
Current Realities
The impact of the pandemic, supercharged by surging inflation levels, has destabilized the labor markets to levels not experienced in recent decades. The turmoil has challenged employers to rethink their rewards strategies and systems.?
Minimum wages are being increased by regulatory action in states, counties and cities (the inability of Congress to agree on anything has resulted in federal inaction). Abrupt increases in minimum wages forces employers to increase base pay for anyone below the new minimum. But it also creates the need to decompress ranges and wage rates to provide reasonable differences between jobs and people. A recent consulting client had to raise the pay rates of the majority of employees to avoid situations where subordinates were suddenly paid as much as their supervisors and new employees paid as much or more than those with long service.
The rate of movement of people between organizations has escalated, at least partially due to the pandemic. This has created pressure on employers to not only meet minimum wage requirements but to meet the rates being offered by competitor organizations.?
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In addition to these factors there is a widespread expectation on the part of workers that they are due pay increases at least as large as inflation rates. This is due to the failure of employers to make it clear that base pay rates are based on the cost of labor, not the cost of living. The cost of labor has exceeded the cost of living in every year for a few decades until the recent inflaction surge. During that tiem employees expected their employers to match competitive market rates. There was even a two-year period when there was virtually no inflation, but this did not translate to an expectation by employees that there was no need to increase wages. This failure to explain the economic realities of managing pay has put employers in the position of looking like they are trying to minimize pay levels while claiming to offer equitable and competitive rates.
Inflation rates have now subsided, but now employees often think a "catch up" is necessary, in the formof large pay adjustments. Dock workers have gone on strike and believe they are due 50% pay increases. Having dug a hole by not creating an understanding of the principles underlying sound pay administration employers will have to do something to get and keep the talent they must have to succeed. The old adage “if you are in a hole the first step is to stop diffing” should be considered. Rather than making large adjustments to base pay rates now, which will create permanently high payroll costs, other options are available.
Employers missed an opportunity during the two-year inflation surge. A more effective strategy would have been to adjust base pay rates by 3-4%, (most common budget), and to also grant a one-time cash award as an inflation offset. By using cash awards, employers could have been able to decide if this approach should be repeated based on continued high inflation.?The offset approach demonstrates that the employer recognizes the impact of unusually high short-term inflation on employees and does what is econmically viable to relieve its impact on their quality of life.
Using cash awards also opens the door for making a portion of direct pay variable in the future.?Profit-sharing and organization-wide performance-sharing plans are used much less often in the U.S. than in many other countries, where employees accept this concept. Aligning workforce costs with organizational resources has become even more critical in recent years as the economy has become more volatile. Increased usage of variable pay by rewarding performance at the organizational, unit and/or individual levels can provide motivation to concentrate employee efforts on what the organization requires.
Granting the same base pay increases to everyone sends the message performance is not important and also tends to alienate the best performers. But augmenting individual pay with group and/or organizational incentives can make it clear the organization needs to succeed in order to be able to pay employees well.?
Future Strategies
Strategies that define organizational needs and base rewards on meeting them can be sound from both motivational and economic perspectives. “Knowing what is expected” is the factor that has the greatest impact on employee motivation and satisfaction, according to extensive research by Gallup. Waiting until the end of the year to find out what rewards might be on offer (and not knowing what will determine them) leaves employees without guidance on how to best focus their efforts. Past practice impacts future expectations. Yet expectations can be modified to align with organizational interests by selecting the right rewards strategies and communicating them effectively. A?return to the still waters of the last few decades is unlikely so employers would be well served by planning for navigation in whitewater rapids.
About the Author:?Robert Greene, PhD, is CEO at Reward $ystems, Inc., a Consulting Principal at Pontifex and a faculty member for DePaul University in their MSHR and MBA programs. Greene?speaks and teaches globally?on human resource management. His consulting practice is focused on helping organizations succeed through people. Greene has written 4 books and hundreds of articles about human resource management throughout his career.