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Recession revisited: Is it time for cautious optimism on pay?

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in HR Management,Human Resources

by Jason Kovac

We had good news and bad news this summer on the compensation front. The bad news: Average corporate salary increases will be just 2.2% next year, the lowest in at least 3½ decades. The bright spot: That might be rock bottom, as HR execs are projecting a 2.8% increase in 2010.

That’s still a long way from the 3.8% increases that were standard for the past 10 or so years. Who knows when we’ll return to pre-recession compensation practices that virtually guaranteed every employee a raise every year? Perhaps we never will.

As hard as this recession has been on everyone, it has forced organizations to look at how to spend compensation budgets more efficiently and more effectively. What has shaken out is a new system of pay raises and bonuses that actually rewards employees for doing top-notch work rather than for simply showing up for work.

It turns out, that could be a practice that will endure, even as the economy recovers.

Here are five lessons that compensation pros have learned during these hard times, and a look at how we might apply them as the economy improves:

1. Don’t guarantee pay raises

As recently as August 2008, HR pros predicted that pay raises would average out at around 3.8% in 2009. By the end of 2008, they had whittled that prediction to 3.1%. Turns out, it will be more like 2.2%.

So while it looks like organizations are loosening up salary budget increases because they believe they will pull out of the recession by next year, they can’t be sure.

Advice: Don’t overpromise pay raises. Use a hopeful tone when addressing compensation with employees. Tell them that things are looking good. But make it clear that we all have to wait and see. It’s better to come through with more than you promised than with less.

2. Re-evaluate how you reward employees

The recession forced many organizations to stop the age-old practice of giving every employee a raise every year. Instead, they’re withholding raises from underperformers so they can reward their stars with higher-than-average increases.

That’s a good strategy, even in an easy economy. Your top performers expect and deserve better-than-average raises. They work hard, drive revenue and deserve the money. And in good times or bad, they can find work elsewhere because they’re stars. Pay them and keep them.

3. Determine why you bonus

Most organizations have stopped handing out across-the-board bonuses at holiday time, and many will never resurrect the old everybody-gets-one routine.

But consider the impact of the change. If you see a dip in morale because the December bonus is gone, it might be worth reinstating. The price of a turkey or a nominal cash bonus might be a small gesture that can have a huge impact.

4. Revive the 401(k) match

Only about 14% of organizations discontinued it during the worst of the recession, which means 86% of your competitors still offer it. That’s a benefit that can make a difference to an employee deciding whether to jump ship.

5. Restore cut pay if you can

Even if they didn’t like it, most employees who suffered pay cuts understood that reducing pay meant saving jobs. They might not be quite as understanding if your organization decides to make the pay cuts permanent.

Some will stay, but your top performers probably believe they’re worth their original salaries. They’ll look for other employers that agree.

The key to successfully retaining recession-driven changes in compensation—if they’re working and necessary for your organization—is good communication with employees. Arm yourself with evidence that a permanent, updated pay structure is the best way to build back up to pre-recession profits and a stable need for your workforce.

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Author: Jason Kovac is compensation practice leader for human resources association WorldatWork. Contact him at jkovac@worldatwork.org.

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