For all the noise around staff being more motivated by other things such as personal development and a sense of purpose, compensation still plays a pivotal role in attracting and retaining talent. But pay is often a source of confusion rather than a tool for engaging employees and planning for your business’ future.
That may be because we are not adapting compensation practices at the same pace as our businesses are evolving, instead holding on to tried and tested approaches to managing fixed and variable pay. Some key trends to watch in 2020 are:
Approaches to fixed pay have remained unchanged for more than a decade. Hampered by restrained wage growth, employers have either stuck with a cost of living approach or a performance-based merit matrix that often ends up allocating the majority of pay budgets to average performers.
This is despite all the evidence that the performance ratings do not work. Both these approaches are also symptomatic of viewing wages as a cost rather than an investment in your talent.
When it comes to talent the new currency is skills. Despite consistently high levels of employment the pool of skilled labour is shrinking and most employers cite hiring skilled workers as their key human capital challenge, particularly for digital workplaces.
This is leading to a new focus on pay as more of a talent insurance that considers not only past performance but future skill requirements. Skills-based pay has a stronger market alignment with the ability to flex and adapt in a tight labour market.
However, skills-based pay immediately gives us a big challenge because traditional approaches to compensation have been based on paying for the job and not the person or skills that they bring to the table.
Segmentation and personalisation
We are now facing a workplace where we could have employees ranging from 18 to 80, all with different levers when it comes to engagement.
At the same time the continuum of employment continues to evolve as companies seek more specifically-skilled workers and those workers push for non-traditional work arrangements. We need to develop an employee value proposition that considers the needs and preferences of all workers.
Employers have been deploying a segmented approach to compensation, often through tailored incentive plans and sometimes through different pay band structures for different talent groups.
The next step is personalisation, which is less about employers deciding which packages best suit different employee groups and more about employees designing their own personalised pay packages.
Some first-mover companies are already allowing employees to flex between fixed and variable pay and make choices in line with their lifestyle and appetite for risk.
But it’s important to set up the processes to listen to what employees want, what engages as much as it disengages. In its Global Human Capital Trends report for 2019 Deloitte states that “reward programmes are falling behind both internal and external expectations. For workers reward means more than money.
"They are looking for personalised rewards that meet their needs – and yet most organisations have been guessing and don’t know what their people want or value.”
In today’s agile business environment how many employee lifecycle events that might trigger a pay adjustment actually happen on a strict annual basis?
Managers also want to be able to benchmark their employees on an ongoing basis and allocate awards when effort takes place or in response to an immediate competitive threat. Instant rewards also reinforce instant feedback in a powerful way. It’s the same principle that underpins recognition schemes. As a result some employers are now considering how they might use real-time reward.
Ad-hoc or spot awards are nothing new. But many stopped using them because pay changes were happening under the radar with a general lack of governance and allocation, which often undermined pay for performance plans or compensation principles because they were managed out of context.
What is interesting to note here is that none of these reasons are employee centric; they were all more process issues. We are working more and more with clients who want to build a more ongoing or real-time reward approach but one that is underpinned by governance and budget control.
Finally, we can’t close off this year’s trends without mentioning pay equity, which remains a hot topic. Employers are increasingly recognising that tackling pay equity not only reaps business benefits, it demonstrates commitment to a diverse and inclusive workforce that is a differentiator in the war for talent.
Undertaking a pay equity audit is important to understand not only where your organisation stands against legislative requirements but also to ensure that you can comfortably justify what you pay.
In 2020 we need to continue to focus on differentiating pay to retain key talent while keeping one eye on the future to ensure we use pay as talent insurance and a strategic lever.
Ruth Thomas is industry principal at Curo Compensation