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Finance: Salary Packages for Executives for 2009 Under the Microscope

 





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Many senior executives in South Africa and around the world may find themselves with leaner salary packages in 2009, however, a new study shows that their merit payments may remain at much the same level as last year – averaging at around the 3,5% mark.

Leaders Unlimited Korn/Ferry International partner Annelize van Rensburg said in Johannesburg that as employers are finalising their salary budgets for 2009, many published surveys concluded that merit budgets for 2009 were on track to remain consistent with previous years’ - averaging at around the 3.5% mark.

A recent on-line poll of employers conducted by WorldatWork reveals that 40% of respondents have no plans to change their 2009 budget due to the current economic situation. Thirty-three percent plan to decrease their budgets for 2009. A very small percentage of employers plan to increase their budget for 2009 while the remaining respondents indicate that they are unsure about their course of action.

It found that as more economic turmoil surfaced toward year end, some organisations took a new look at merit budget plans for 2009. Follow-up reports were issued by some survey vendors that indicated employers had an increased interest in reducing planned merit budgets in an attempt to help weather the economic storm.

Van Rensburg said while the impact of the world-wide financial meltdown might not hit South Africa as hard as some emerging economies, there will be adjustments to remuneration packages and merit bonuses in particular.

According to a number of international surveys – some of which included South Africa - average merit increases may fall below 3.0% to 2.8%. Hewitt Associates reported a similar trend in survey data compiled in November and early December of 2008 which indicated average merit increases across all job levels expected to fall to about 2.5% down from their initial estimate of 3.8%.

“Regardless of what data source you use, it is reasonable to assume that most employers are being cautious, preparing for long-term economic difficulty and keeping their options open for 2009. They will likely plan smaller merit budgets and salary range adjustments in an effort to ensure fiscal stability for the future. Lower salary increases will likely stimulate the need for creative reward options in order to help employers retain key employees,” she said.

The surveys all agree on one point: limited merit increase budgets make it difficult for organisations to recognise top performers. Employees cannot expect pay raises to be distributed evenly across the board. Gone are the automatic “entitlement” increases or “one-size-fits-all” approach to base salary increases of the past.

“Small increases, no increases or pay freezes are not meant to de-motivate employees.” In tough economic times, it is often a necessary evil to ensure economic stability and longevity for the enterprise and limit the need for layoffs.

“What is critical here is to effectively communicate this year’s compensation news to employees in a sensitive and intelligent manner.”

“Employees who understand how and why they are being paid as they are tend to be more satisfied. Satisfied employees are more engaged and productive. Ultimately, thoughtful and careful communicating is the key to delivering what may be disappointing news in order to salvage employee morale,” Van Rensburg said.

This growing trend was in evidence as revealed in Mercer’s 2008/2009 US Compensation Planning Survey released in October of 2008. This study indicated the there was increased rigor around performance management programs with highest performing employees receiving on average 1.9% more in merit increase than average performers. This is an improvement over what has happened in the past; however, 1.9% is still not a significant enough difference.

South African employers will need to follow this approach and differentiate more between levels of performance when considering performance-based merit increases. This means that it is likely that good performers may get less of an increase than expected so that the top performers can be appropriately rewarded. Good performers near the top of their salary range may see no increase at all.

Van Rensburg said most employers were aware that pay increases alone won’t work as a way to attract and retain employees. In fact, the current economic situation presents employers with an opportunity to institute more creative ways of rewarding individuals and letting them know that their contributions are appreciated.

“Employers will more likely need to consider alternative rewards such as employee development, training, additional holiday time and work-life balance options such as telecommuting and compressed work weeks as additional features to their rewards program in order to attract, retain and reward key employees”.

The New York Times reports that some employers have considered some more extreme measures such as unpaid vacations, withholding of bonuses, voluntary or enforced furloughs, wage freezes, reductions of contributions to retirement and health care plans and pension cuts.

“While some of these measures may seem extreme, they are preferable to layoffs which can be painful for both employees and employers.”

Organisations may choose to reduce merit budgets for 2009 as a way to weather the current economic storm. Those employers will need to effectively communicate the reasoning for fewer merit Rands and develop alternative ways to reward good performers.

“Across-the-board” increases are a thing of the past. Employers will be called upon to utilise their performance management programs to more effectively link pay with performance and do a better job of differentiating between performance levels when awarding performance-based merit increases.

Alternative rewards including work-life balance options, employee development and training are viable options in lieu of cash when merit budgets are limited, Van Rensburg said.

 
 
 
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