When considering alternatives to traditional pay programs, effective leaders understand labor markets, involve stakeholders and work to tailor the best fit for specific workforces.
Compensation Strategy & Design|Employee Experience|Executive Compensation|Health and Benefits|Ukupne nagrade |Benessere integrato|Work Transformation
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In response to our article on declining salary increase rates in 2024, Will pay increases exceed inflation in 2024?, additional questions have arisen regarding what effective leaders can do that’s “out of the box” to maintain employee productivity and engagement amid skill and labor shortages in many areas.
WTW’s recent 2024 Global Salary Budget Planning Report reveals movement in salary budgets around the world during the second half of the year. As WTW’s Russ Wakelin reported, actual 2024 salary increases are lower than planned in many countries, and 2025 planned increases are lower than 2024 increases.
Because organizations need to continue to engage employees, effective leaders are considering alternatives to traditional programs. WTW’s Trey Davis recently wrote about the critical roles of innovation and creativity in pay programs. Effective leaders take the following actions:
Employ disciplined innovation principles. Effective leaders use a disciplined innovation-design approach to discover and design the most appropriate solutions for their organizations, such as the one outlined by Tony Schwartz in Harvard Business Review’s How to think creatively.
Key components include:
Saturation: Fully defining the problem, challenge or opportunity and absorbing all available information
Incubation: Thinking deeply about the problem or opportunity and incorporating all available information
Insight/Evaluation: Ideating and defining the ideal concept, which often involves stepping away and coming back to the issue later
Verification: Like a scientist in the laboratory, testing the solution against various factors, which may include business context, employee needs, math, accounting, regulations, tax rules and disclosure
Within the overall process, the saturation stage may be the most important, as the success of the innovation process requires both a clear definition of the problem or opportunity as well as a deep understanding of all related aspects.
Understand the facts.
Effective leaders understand the innovation process requires deep knowledge of topics and context, including industry dynamics, country and local rules and regulations, business lifecycles, strategic business priorities, competitive advantages and weaknesses, workforce demographics, employee preferences and performance, and desired culture.
The process also requires an understanding of the dynamics of the relevant labor market(s), where talent is sourced, where it’s lost and what motivates it. It also requires technical experience to assess plan outcomes in both expected and unlikely conditions, accounting treatment, perceived value, administrative complexity, tax ramifications as well as relevant external factors such as the regulatory environment and potential stakeholder reactions.
Craft programs to fit the organization’s unique needs and circumstances. Effective leaders apply creativity and innovation to pay practices, often moving from “market practice” or “leading practice” to “best fit.” This means identifying the optimal solution to address a specific problem or accomplish a set of objectives aligned with the needs of their particular workforce and seeking to maximize the return on investment for that specific problem or set of objectives.
Embrace atypical design features. In the process of developing a best-fit solution, effective leaders embrace plan features (such as production and performance bonuses) that are tailored to specific workforces or countries. Additional examples include offering only base salary and stock options with no short-term incentives (Netflix), setting significantly wider performance ranges in incentive plans (Spectrum Brands), offering a choice of pay devices (Iron Mountain, Tapestry, Netflix) and granting career shares (Lear). Effective leaders neither adopt nor avoid unusual features simply because they are unusual.
Engage stakeholders in pay design discussions. Effective leaders engage their boards and even key investors in discussing the rationale and other details behind innovative pay programs. When managed effectively, unique pay practices don’t result in negative stakeholder reactions. In fact, the most recent say-on-pay resolutions for the five companies above were approved by 92% of shareholders, on average.
Focus on an integrated approach to pay programs and spend wisely. WTW research also shows that leaders are changing the way they approach pay programs in 2024. For example, they’re taking a more integrated approach to base salary, short-term incentives (including annual bonuses or sales compensation plans) and long-term incentives (such as stock programs). WTW’s Lori Wisper wrote recently that these actions – along with updated pay philosophies and a focus on pay fairness – reflect leaders investing in pay more strategically to attract and retain key talent.
Focus on execution. Effective leaders understand that program implementation, communication and administration impact the ways employees perceive and embrace pay programs. While research shows that only 21% of organizations effectively communicated pay programs to prospective employees, effective leaders create an advantage by communicating pay programs in a meaningful way with confidence that the programs are well-designed, managed and governed.
Effective leaders apply an expansive body of knowledge and experience to move beyond market practice to generate innovative solutions that deliver the best fit for the organization and its unique strategy, lifecycle stage, culture and objectives.
A version of this article originally appeared on Forbes on August 20, 2024.
