When worried organizations consider methods to get their arms around (control) high payroll expenses, they typically turn a blind eye to the variable pay component, to annual bonuses or incentives. While the pending business outlook could be getting tighter and management is looking to trim expenses, that particular pool of available cash often appears safe from being touched.
I asked one client why this was the case. The answer I received was that the variable pay expense was already accrued. Which is like saying, “We already have the money,” or “It’s in the budget.” The thinking was that, if payroll needs to be trimmed, that the “cuts” should come from the merit increase pool, not the year-end lump sum payments.
What???
Yes, you heard that right. Some organizations would prefer to trim/cut/slash their employee’s merit increase program, while at the same time leave essentially untouched the large pool of what is termed annual “variable pay.” Thus, the amount that employees would receive may be variable, but short of bankruptcy, they’re going to receive most if not all their normal annual payments.
Are the annual bonus/incentives payments in your organization guaranteed (all or in part) in a similar fashion?
What’s apparently lost in this strategy is that for the lower ends of variable pay eligibility merit increases are still a significant element of total reward. For those further up the food chain they’re making their money on sizable variable pay awards, not from annual pay increases that are averaging about 3%. Management may feel that they can afford to pass on granting their usual merit increases because in their minds the big bucks come in the form of their annual lump sum reward.
That’s not exactly an “everyman” view, though.
Another area of concern is that reducing merit increases effectively reduces an employee’s ongoing disposable income. That’s money that is supposed to pay for tonight’s groceries or the kids’ new shoes. Annual bonus/incentive payments tend to be spent on major purchases like TVs, vacations or even a new car. Very little gets banked, and even less is put aside for groceries or the kids’ shoes.
Merit increases are typically used to reward an employee for their job performance during the recently completed performance period. To cut that raise off at the last minute, and in a way that disproportionately impacts the lower levels of your organization is going to be a hard sell with employees. Not only have the rules changed very late in the performance game, but many will develop a bad taste in their mouth as they begin to recognize how management has taken care of themselves.
In one instance I saw Executives heroically decide to forgo their merit increases but instead pumped up their incentive payments to more than make up the difference. And don’t think that this sort of reward man manipulation is lost on your employees. That sort of questionable behavior will become known. And from there morale and employee engagement goes nowhere but down.
One pushback that you might hear is that cutting a raise in base pay effectively cuts fixed cuts now and down the road – while reducing annual bonus/incentive payments is only a temporary, one-time deal. That’s true, but down cycles in company performance are usually temporary, while lowered base pay levels are permanent and never “made up,” no matter how well the company does next year. Meanwhile, market competitiveness has moved on, whether your pay has or has not.
A Better Way
In my view, if business realities suggest that payroll needs to be cut NOW, then equity and transparency should become the foundation of your follow-up tactics. “We’re all in this together,” should be your mantra. Granted, a great deal depends on the seriousness of the financial strain on the organization, but I suggest that annual merit increases (the disposable income) should be the last pay component to be cut.
I would start by, a) telling the employees that hard times have arrived and that you have to make some temporary changes to pay rises, then b) consider trimming the merit increase budget by 1% or more, depending on circumstances, and c) hit the incentive payments as a true reaction to “we didn’t perform so any bonus/incentive needs to be reduced.” Because if the organization isn’t doing well do you really want to be seen by your employees as still granting business-as-usual bonus/incentive awards? Talk about mixed messages.
As a variant, you could reduce the merit budget and tell the executives that they won’t receive a merit increase this year. Just be careful not to over-compensate the incentive payments to make up any loss. Poor form, as the Brits would say.
As a final thought, ask yourself, do you have a pay-for-performance philosophy where you work? And if you do, are you walking the talk or just kidding yourself and your employees?
Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations. He is also associated with several HR Consulting firms as a contributing consultant. Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation. He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a clowder of cats.
Creative Commons image, "Money in Hands," courtesy of http://401kcalculator.org
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