For much of the 20th century, there was an expectation that a company provided job security to workers, and those workers—assuming they were competent—could expect to have a secure career. One of the elements that went along with this arrangement, in theory, was a relatively stable pay progression, with regular increases over the years for workers who stayed in a job for a long period of time. Compensation for much of the modern era in the United States has been thought of as some combination of salary, bonus and retirement, such as a 401k. In practice, it was never that simple.
The framing of compensation as the combination of salary, bonus and retirement was already on the way out in recent years thanks to the pressures of globalization and technological disruption, and the pandemic has decisively made it a thing of the past. With inflation on the rise—so much for transitory—and wages rising along with it, CHROs are facing conditions that have not been seen for decades. The problem has become particularly acute because “in the pandemic, a lot of companies took their foot off the gas in terms of bringing talent into their organizations, especially companies that are a bit more reactive,” says Chris Sinclair, Chief People Officer at Bayard Advertising. “Then, as the economy flipped and things have gone back into high gear, everybody needs to build things back up and they need to find talent.” It has created “a massive supply and demand issue,” Sinclair argues.
“It feels like it’s almost back to the Reagan years,” says Don Lowman, Senior Client Partner, ESG and Global Leader Total Rewards at Korn Ferry. “We’ve been dealing with relatively low inflation for probably 20 years now, with a couple of blips here or there. So, for most of the chief human resources officers today, they’ve never seen this before. This is new for them.” Compounding matters, the United States is approaching full employment and talent markets are running hot. “Across all industries, there is a shortage of talent, or at least of people who want to apply for the jobs that are open,” Lowman says.
All of these factors combine to create upper pressure on wages. “Being competitive on wages is table stakes,” says Susan Grimbilas, Partner and Managing Director and Global Head of Human Resources at Boston Consulting Group. She argues that any company that thinks it can compete on compensation alone has already lost the battle. “There’s always somebody else who will pay more.”
The Fixed Costs Dilemma
These conditions put CHROs in a tough position. On the one hand, they are charged with attracting and retaining the talent necessary for companies to thrive. On the other, they are also challenged to control labor costs. There’s a reluctance to increase base salaries “because when you do it, you’re increasing your fixed cost base,” Lowman says. Yet for some high demand roles, companies are effectively competing in a spot-market, paying “20 to 30 percent increases over what those people are currently getting paid to get them to leave,” Lowman says.
Raising salaries for new hires either creates a pay-gap with existing employees—and dissatisfaction—or puts additional upward pressure on salaries for current employees too. The danger of this approach is that if companies raise salaries and then a recession strikes, they may suddenly be in the position of having to lay off workers they can no longer afford. This dynamic has CHROs turning to alternative levers to increase compensation for employees without drastically increasing fixed costs. Right now, workers have leverage, and they’re using that to push not only for higher wages, but also better conditions and more flexible work arrangements. (And the importance of flexible work arrangements should not be underestimated; Sinclair says roughly “two thirds of employees are now actively pursuing fully remote.”)
While some companies were already changing their thinking on compensation before the pandemic, Covid “drove home for employees and for employers both what was possible and what was wanted,” Grimbilas says. “It’s not just about the paycheck, it’s about all the ways that we engage the hearts and minds of our employees, so flexibility programs, wellness stipends, how we think about facilitating people working from home office setups,” as well as new methods of recognizing employees throughout the year.
Communication Is Key
Rigid, blanket compensation policies risk increasing fixed costs while also failing to respond quickly to shifting market dynamics. “Pay and compensation is really just one piece of it,” says EY Americas Vice Chair for Talent Ginnie Carlier. “Employees are looking at the total reward package, which includes pay compensation, well-being benefits, development opportunities, recognition programs, retirement benefits. It’s much more holistic.”
While in the past companies could get away with a standard, annual increase and little more, that is barely noticed now. In a labor market in which salary is table stakes and workers are always able to shop around for a better deal, “organizations need to have a very defined and effectively communicated compensation policy,” Carlier says. Employees and leaders alike must understand the policy, because, she says, it must serve as a “North Star,” to help companies navigate through ever-changing market dynamics. Simultaneously, CHROs and companies need to be nimble in terms of how they are thinking about deploying compensation, otherwise they’ll be left behind by the competition.
EY, for instance, has invested $2 billion in total rewards since 2020, spread across not only base compensation but also things like increases in annual bonuses, well-being benefits and new recognition programs. The company has also created a transition fund which helps employees with things like increasing commuting costs, daycare costs and other areas that are key for workers in a hybrid environment. And compensation itself can be a tool for communicating to employees about what the company values and how they can expect to be rewarded.
For instance, Carlier suggests targeting increases around specific skill levels. “Professionals want to be recognized for their contributions,” Carlier says, which is why EY has “heavily invested in a spot bonus—a sort of mid-year bonus where your leaders can recognize people for extraordinary contributions.” The spot bonuses are a way to recognize very high performance, can be highly individualized, and ideally help to keep employees satisfied and engaged while also signaling what the company values and how it will be rewarded.
As CHROs increasingly turn to non-salary compensation in a bid to lure and keep employees, they must be careful about how they’re designing benefits programs. “Childcare is not just about you paying for childcare,” asserts Grimbilas. “Are you paying for elements or subsidizing elements of it? Or is it also about how you think about emergency childcare? How do you think about structuring employees’ work so that they can balance their lives?”
These sorts of programs have to be designed carefully so that they solve challenges in employees’ lives and also reflect the correct values and incentives for the company. Many companies are increasingly looking at student loan assistance as another element of compensation, for instance. In that case, Grimbilas says, “it’s not just about a program to repay student loans, but how do we continue to enable people to learn and develop and to get education?”
Sinclair sees career development and educational opportunities to be the next key battleground for companies. “People legitimately want to know about the culture of the company,” he says. “Are there opportunities to learn and progress?”
This focus on development—particularly in terms of a career—is a key area where companies can win by helping their employees grow. “Today’s workforce,” Lowman says, “expect their companies to take an interest in their career development. That is something that organizations are starting to say, ‘Okay, that’s not a direct financial hit to us to provide better opportunities for career development.’”
At many companies, this evolution toward total rewards thinking has happened incredibly quickly. Sinclair likens the change in mindset to the shift to e-commerce during the pandemic which “grew 10 years of the space of six months.” Because of the speed of change, CHROs need to be careful to make sure they are constantly benchmarking, gathering information about the market and what their employees need, and that their policies are shaped to what their company actually needs right now. There’s no one size fits all strategy. Some CHROs “are going to lean more on the cash compensation than maybe career progression and culture, and that’s fine,” he says. “They just have to do that with the awareness that there are going to be a lot more candidates who are not going to want that job.”
While considering factors such as childcare or education in the compensation formula may seem simple, it is often a radical departure from how things have been done. These are fundamentally new conversations for many CHROs and companies, Grimbilas says, because they are really about, “How do we think about engaging folks? There are many levers.”
Understanding Your Compensation Philosophy
Carlier identifies four key factors that any CHRO needs to take into account when formulating—or revising—their compensation philosophy. This philosophy, she says, becomes the North Star or set of rules against which compensation policies can be measured.
- Find your market rate. This means knowing which market you’re competing for talent in and “making sure it is well-defined.” And this isn’t a one-time thing; it requires constant benchmarking to keep current.
- Work with the business. “At the end of the day, you’re working with the business and supporting the business in the engagement of your employees,” Carlier says. Any compensation decisions need to support the overall goals and needs of the business. “Make sure the business is aligned with what your thoughts are around compensation.”
- Be holistic. Compensation today isn’t just about the market rate, or the needs of your business, or the desires of individual employees, even those who are particularly high value. CHROs need to weigh all of these factors together. “You’ve got to look at it as a total rewards package,” Carlier says, because that is “incredibly important to the talent pool today.”
- Be transparent. “When you make changes to the compensation philosophy,” such as adding benefits, “it’s really important to communicate what those are,” Carlier says. This means not only what the benefits or compensation plan is, but also what the timeline will be. And it also means reinforcing to leaders what is actually available to employees so they are able to “make suggestions or remind our employees of what is available.”