Category: HCM

The Compensation and Benefits Package an employee receives is considered the main motivator for them (outside of a personal sense of purpose). As such, it plays a crucial role in determining successful recruiting, engagement, and retention strategies. Failing to offer the right mix of benefits and compensation will translate into additional costs for the organization. According to a survey by Pew Research Center, low pay, lack of opportunities and feeling disrespected at work are the top reasons why Americans changed their jobs. Findings related to the COVID-19 impact showed that employees’ lifestyle has changed, and flexible working hours are the top benefit, followed by more paid time-off options.

The COVID-19 pandemic has had a significant impact on the compensation of employees across various sectors and industries. According to a survey by WorldatWork, in the USA an average salary structure has seen upward adjustments of 1.9% in 2020, representing a significant slowdown from 2.2% in 2019, affected by a much larger number of organizations reporting no salary structure increase. According to a report by Willis Towers Watson average actual salary increases hit 5.4% in 2023 as compared to 5.0% in 2022 among organizations in the top 15 economies around the world. It is estimated that the increase would be around 5.0% in 2024.

Compensation trends that have emerged or intensified during the COVID-19 pandemic:

• Variable pay: Many employers have shifted from fixed pay to variable pay to align their compensation costs with their business performance and to incentivize their employees based on their results. Variable pay can include bonuses, commissions, profit sharing, stock options, or other forms of contingent rewards. According to a survey by Aon, 42% of companies in India plan to increase their variable pay budgets in 2021, up from 33% in 2020. This is to reduce the fixed costs and can modify costs based on company performance and market outlook.
• Total rewards: The pandemic has also prompted many employers to adopt an integrated approach to compensation, which considers not only monetary rewards but also non-monetary benefits that employees receive. According to a study by timesjobs.com bureau, 70% of companies in India plan to enhance their total rewards strategy in 2021, up from 56% in 2020. This results in a change in employee perspective, giving them the impression that the organization is looking at the overall well-being of the employee.
• Proximity Bias: The recent shift to remote or hybrid work has created a “visibility” concern for many employees. Proximity bias describes how people in positions of power tend to treat workers who are physically closer to them more favorably. This stems from the antiquated assumption that those who work remotely are less productive than those who work from office. Additionally, this is an example of the out of sight out of mind” effect.

A survey by the SHRM (2018) showed important correlations between compensation and benefits and job satisfaction, where 92% implied compensation and benefits were critical to their job satisfaction; while 32% stated that the reason why they loved working in the company was exactly the benefits and compensation they received.

Factors that have affected the compensation pre and post COVID-19:

• The type of industry and occupation: Some sectors, such as health care, technology, e-commerce, and logistics, have experienced increased demand and growth during the pandemic, while others, such as hospitality, tourism, entertainment, and retail, have suffered severe losses and closures. This has resulted in different compensation trends and strategies for different industries and occupations. For example, some employers in high-demand sectors have offered bonuses, incentives, or retention payments to attract and retain talent, while others in low-demand sectors have implemented pay cuts, furloughs, or layoffs to reduce costs and survive.
• The mode of work: The pandemic has also accelerated the shift to remote work for many employees who can perform their tasks online. This has created new opportunities and challenges for compensation management. On one hand, remote work can offer flexibility, cost savings, and productivity benefits for both employers and employees. On the other hand, remote work can also pose issues such as communication difficulties, isolation, security risks, and performance evaluation. Therefore, some employers have adjusted their compensation policies to reflect the changing nature of work and to reward employees based on their outcomes rather than their inputs.
• The employee expectations and preferences: The pandemic has also changed the expectations and preferences of employees regarding their compensation and benefits. Many employees have prioritized their health, safety, and well-being over their financial rewards during this crisis. Therefore, some employers have enhanced their non-monetary benefits such as health insurance, wellness programs, paid leave, flexible work arrangements, and employee assistance programs to support their employees’ physical and mental health.

Insights:

Some of the changes that companies need to do to their compensation policies post covid are:

• Change performance evaluation: Review the performance evaluation and incentive systems to align them with the new goals and challenges of the post-covid era. Instead of leaving it up to chance, create clear guidelines for each role. Define responsibilities, expectations, and next steps for career growth. Having a defined path for growth makes it easier to evaluate both in-office and remote employees. And your team will appreciate knowing what they need to do to be rewarded for their hard work. Our recommendation is to schedule regular check-ins with the employees to develop a more inclusive workplace for remote workers.
• Change pay structure: Employers may also need to redesign their bonus, commission, stock option, and other incentive plans to motivate and reward employees for achieving the desired outcomes. This will help in reducing the fixed costs and keep the employee motivated at the same time.
• Enhance benefits: Evolve the benefits and rewards that support employee well-being and work-life balance. Companies need to offer benefits and rewards that address these needs, such as health insurance, wellness programs, mental health support, paid leave, childcare assistance, learning and development opportunities, etc.
• Communicate: Employees are happy if they feel they are being paid fairly for their work, but they are more engaged if companies have a transparent compensation policy. Employees trust companies more if they understand the company’s decision-making process for employment packages, and employers need to be able to explain this clearly to the rest of the organization. Even if an employee disagrees with the company’s process, it opens a path for them to communicate their opinions and concerns, leading to a healthy discussion for companies to improve their compensation and benefits packages.
• Conduct Employee surveys: Surveying employees from all rankings on their needs and what they look for in a company gives perspective on what the company can do to improve how they take care of the workforce. Employees from one company can have diverse needs and wants compared to other employees from another company, so it is important for employers to understand their workforce and not solely rely on and copy other companies’ compensation and benefits packages. Employee surveys and feedback also reveal what employees think of the company and can help clarify any misunderstandings or catch any grievances employees could develop towards the company in the future.

Cut the Bell

One little toy I’ve always found fascinating is the Galton Board. You may not have heard of it, but if you ever mindlessly scroll YouTube or Instagram like me sometimes – I am sure you’ve come across this small glass box with small metal balls poured on from the top. These randomly fall and hit spaces within the Galton board and yet they invariably fall to arrange themselves into a ‘bell’ shaped pattern. This mound of balls falls into what we commonly known as Gaussian or “Normal” distribution. Most random things arrange themselves (at least somewhat) into this formation. This is following the Central Limit Theorem in Math. In fact, most human experiences follow this pattern. Plot human height on a bar chart, what do you get? A bell. People’s reaction times? Bell. Plot shoe sizes, what do you get? A bell. Plot the circumference of bells on a plot, and what do you get? I have never tried plotting it – but I assume you get a bell curve!

For many years, it has also been how we visualize employee performance. In the context of talent management this feels, for the lack of a better word, fair. It makes intuitive sense that most people are average or near-average performers with both the best and the worst performers tapering off at the two ends of a bell-shaped curve. It represents people are being clustered around the mean. This idea is so ubiquitous that we see organizations with a performance calibration process where a “curve-fitting” exercise is undertaken. This is essentially to force-distribute people by rating on the bell curve. Now, a lot of the customers I’ve worked with swear by this practice and I’ve had many a healthy debate on this. Sure, this makes perfect sense in some cases too. If you have a performance linked compensation and don’t want to spread your resources too thin, you must be mindful of how people are rated. Also, I’ve seen way too many talent management processes to claim that there’s just one way of doing things. However, by assuming that normal distribution is representational of reality, we may end up under-rewarding our best people while being extremely harsh to those who need only a little help to do better.

The fact that GE, which popularized this concept in the first place, got rid of the bell curve fitting says something about the truthiness of the bell curve. Human performance isn’t a random and finite occurrence. It is deliberate, and, it doesn’t have finite variance. It is possible to have vast differences in performance. When approached with a growth mindset – this creates an upwards climb for all involved. If we curve fit, we may be essentially denying the truth its right to assert itself in our data. We’ve forced a narrow view unto the complex intricacies of reality. If we simply collect the data and don’t fit it (and ensure the data is actually representative), we are more likely to see what’s called a Power Law or Pareto Curve.

As opposed to the bell curve, this curve typically shows that there are a small number of very high performers, with a long tail of variably average performers and a low number of under-performers. It is named after the Pareto Principle which, and I am generalizing, states that 80% of the outcomes come from 20% of the inputs. Basically, a smaller number of people give organizations outsized returns. It implies that there are some super-talents in a team, and most people are below the mean. This doesn’t mean they are low performers though. But this truth only surfaces when we stop trying to force-fit people in the bell curve, and let the data speak without bias or forced comparison between nuanced and complex work outputs. Depending on your industry and culture (and all talent management is a culture setting or culture preserving exercise), this may make a lot more sense than using a bell representation.

This helps deliver a mindset shift in how we see our people. Any performance measurement system will only be successful if continuous improvement and feedback are built into it, moving everyone constantly towards a north star. Otherwise, the performance review becomes the dreaded, boring, mundane and perfunctory process we all know and hate. In terms of rewards too, it is important to shift from a forced bell curve mindset to reward people fairly and retain top talent with a disproportionate impact on your organization. That’s what happened at Microsoft. They found that their best people were leaving because of forced curve fitting. They ditched the bell.

While I understand the Bell Curve has served many organizations well for years, or at least it feels that way – I do urge organizations to reconsider their strategy for Talent Management to make it a true lever in their success. Talent can give you outsized returns if done right.

Acceptance of the Pareto Curve is just one of the many, many mind-set changes required to make Talent Management processes truly useful in building high performance teams and delivering hard-hitting results, but those are for future blog posts! For this new year, all I ask is that you relook at some of the oldest truths about talent management and consider some changes that would help your organization soar to new heights in 2024 and beyond!

We at Orbrick believe that value follows the pareto-principle too. Small investments can yield outsized returns. We love working with customers to unlock those paretos in their own organizations. Speak with me directly to discuss how we can help make Talent Management (or HCM in general) deliver more for you.