After the uncertainty of 2020 many organisations are finding they’re working with extremely limited salary budgets.

And while some countries in Asia Pacific are emerging from the pandemic sooner and at less economic cost than widely expected, others are either yet to recover or still in the middle of it. The trajectory of a post-pandemic recovery remains uncertain.

As leaders seek to motivate and engage a fatigued workforce – one that had hoped the tide would turn as we entered 2021 – many are finding that salary increases are again off the table. 

It’s very much a case of being stuck between a rock and a hard place. Here, we discuss some of the ongoing reward challenges in 2021 as well as a path forward to break free of the bind.

The rock: the limited budget

Many firms had salary freezes in 2020 at the height of the pandemic. But as the world tilted, it was easy for employees to see and understand why this was the case.

Fast forward to 2021. The pandemic continues and patience is running out. Another salary freeze is unlikely to be acceptable to all staff. This is particularly so for your high performers who would usually be first in line for higher increases within a reward scheme aligned to performance.

The hard place: the demotivating power of small increases

As leaders contemplate how to make the most of tight budgets, they may consider unorthodox solutions like reallocating money between employees in order to differentiate increases.

For instance, organisations may link salary increases to individual performance, tying the increase to performance rating or other performance metrics (like talent assessment).

But a word of caution is required with this approach because the employees who don’t receive an increase will feel dissatisfied, and there’s no guarantee that high performing employees who benefit from the reallocation will be any happier.

Though they may appreciate the effort, if the size of the increase is small, it may be considered unfavorable against past increases. The result is a double hit to engagement.

Here are a few things organisations can do to better manage their reduced salary budgets.

Breaking the stalemate with non-financial incentives

When salary increases aren’t available to meaningfully differentiate rewards, it’s important to step back and look at the entire reward picture. Other elements of a total reward offering can be used to recognise your high performers.

This is the time to consider how incentive plans, when appropriately aligned to the organisation’s strategic plan, can reward people who are contributing to the right outcomes in the right ways.

Rewards extend far beyond base salary increases, bonuses and benefits and leaders should consider how they can maximise non-cash elements of their reward strategy. The returns from fully exploiting an effective non-financial reward program are high due to their relatively low cost and high retention value. 

This is also an opportunity to customise rewards to appeal to what individuals will value most, whether it’s greater flexibility, additional leave or specific career development opportunities.

Shift the culture of entitlement

For years, CEOs have bemoaned a pay entitlement mindset in their organisations, especially as it relates to base pay increases. The current economic conditions could present an opportunity to shift this mindset.

Instead of across-the-board increases, employees can expect to see more variation in the level and distribution of salary increase budgets, both within organisation employee groups and across industry sectors. The focus instead will be on differentiation for strong individual contribution, on critical or hotskill roles, and lower paid employees (relative to market and internal comparisons).

Differentiate pay competitiveness

Organisations can also consider differentiating salary increases by competitiveness relative to market, regardless of performance. This can be particularly relevant for critical job groups and functions that provide a clear value-add to the organisation. A better-than-median market positioning strategy may not be relevant across all jobs, especially for those in enabling and support functions.

This approach is especially useful to companies that want to reinforce equity while varying pay by market position or have particular pay equity concerns.

For more suggestions on how to manage your reward budgets during challenging economic times read our 10 steps to reward optimisation.

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About the contributor

Paul Wright is a Client Director for Korn Ferry Advisory, Australia. Paul is a business development specialist focusing on assisting clients with reward and employee engagement solutions. He has over 20 years of experience with reward solutions focused organisations.

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