Compensation management during recession

By Ankita Agarwal on January 15, 2013

During an economic downturn or recession, one of the most severe challenges that human resource managers face relates to designing the employees’ compensation structure. A structure that will serve the needs of both the employees as well as the organization. Compensation management is always a tough job for an HR manager because they need to serve the interests of both the employees as well as the organization who mostly have conflicting interests. While employees always feel a need for better pay, the employers make every effort to finalize the best bargain. So, this tussle continues. This tussle gets even more severe during recession when organizations strive hard to survive in competition and employees find it difficult to survive in the organization.

How firms manage human resource costs during recession?

Recession is a time when the business activities record a slowdown leading to lower turnover and reduced profits. This compels the firms to cut down their expenses and improve their sustainability. Most of the times firms resort to massive layoffs as a remedy for cost-cutting. They either terminate large numbers of employees or sometimes freeze their salaries till the time economy recovers. Apart from this, other cost-cutting measures normally adopted by businesses with respect to the human resources include:

  • Suspending hiring and training activities.
  • Minimizing overtime requirements.
  • Cutting the existing pay packages.
  • Suspending medical and other allowances.
  • Changing the employees’ payment cycles.
  • Offering lower salaries at entry-levels.
  • Hiring more of contractual workers.
  • Replacing paid leaves with unpaid ones.
  • Hiring internal trainers and consultants.
  • Adopting job rotation so that vacant positions be filled by the existing staff only.

But all these measures adopted by the firms usually have negative impact in the long-run. So, the need is to manage compensation strategically.

How to manage compensation during recession?

Performance-based pay system

Employee’ compensation poses a major threat for the firms during recession because recession constrains the finances of the firm and thus they try their best to cut their compensations. But the solution does not lie in cutting these costs, rather adopting a strategical approach to compensation management. The best strategy is to adopt performance based pay system during recession. When rewards are linked to the performance, it works for the mutual benefit of employees and the organization. With a performance based pay system in practice, the firm can save significantly on the costs of supervision. The employees remain self motivated to accomplish organizational goals because their compensation is directly linked to their achievements. Instead of offering a fixed salary, it would be better to design a pay package that has both the fixed and variable components. During recession, the firms aim at minimizing financial liabilities and reducing the proportion of fixed pay in the total salary structure would ensure this objective.

How to implement performance based pay system in the organization?

For implementing a performance based pay system, an effective performance appraisal system is a pre-requisite. Unless there is a proper review of employees’ performance, it would be impossible to base the rewards on performance. The very first requirement here is to establish performance standards. The next step relates to measuring actual performances against these standards and find out the results. The performers should be rewarded with the decided incentives or the variable component of the salary, while the non-performers will receive only the meager fixed component of the salary. This acts as a motivation to perform. However, it is also important to periodically review the performance appraisal methods in the organization to ensure that nobody is under-paid or over-paid.