Bad Reward Decisions & Layoffs

Just pay people enough to take the issue of money off the table!

This seems to be the advice du jour.  It is the centerpiece of Dan Pink's recommendations for a better pay delivery model, it sits at the heart of the much touted membership model of pay and it reflects the concerns of many who believe that employers have overstepped in their move to more variable pay and incentives during the economic downturn.

But there is another side to this story that we'd be well-advised to consider.  It comes to us today via the article Compensation: HR's 21st Century Fuse Box, written by i4cp's John Gibbons.  Gibbons draws a connection between the massive job cuts across major European banks (Bloomberg reports that over 70,000 bank jobs have been cut from the likes of Barclay's, UBS and Credit Suisse) and the shift away from bonus to higher base salaries that began in 2009 in response to public criticism of bank bonus practices.  Many of the banks - ignoring the rule that pay dollars at risk are not equal to fixed pay dollars and apparently reasoning that they couldn't cut total cash and retain their talent - simply shifted total comp dollars from the bonus column to the fixed base salary column.  Easy as that!

As John notes, this turned out to be a bad idea, particularly in Europe:

Most Americans don't realize that, unlike the U.S. workplace, most European salaries are locked into place by employment contracts that are not flexible once an offer is formally extended and agreed upon with an employee. ...

By shifting the emphasis of total compensation from bonuses to base, European compensation executives committed the fatal mistake of locking their companies into agreements with their employees, which resulted in commitments to continue to pay the high total compensation figures of 2008 - even while the markets continued to deteriorate. And to make matters worse, they made these commitments in Europe, where they had few options but to either continue to commit to these levels of total compensation or resort to layoffs.

Now we are seeing the results of these compensation executives' decisions - more than 70,000 banking layoffs in Europe since July.

Premium salaries and low-risk pay plans are an attractive idea, and I believe that they have application in some circumstances.  They are not, however, a choice that should be made without careful consideration of what the future could bring.  Because when we aren't thoughtful and forward-thinking about shifting cash compensation from variable forms into fixed base salaries, we are not really protecting our employees from risk.  We could be, in fact, exchanging pay risk for job risk, the latter of which presents little upside (when you have a job, you have a job) and enormous downside.

Let's be careful out there, shall we?

Image courtesy of minimimwifi.com

Comments

[Mercedes]

Interesting post as always, Ann. I would caution Gibbons drawing a direct connection between the compensation shift and the layoff of 70,000 employees as a compensation issue or a compensation design issue. Many more factors are also at play. I hear a management or business issue in lack of education that they poured more dollars into fixed contracts, not a compensation design issue per se. I think there is a great deal of merit to ensuring organizations pay competitively enough to take what I'll "comp anxiety" off the table. As compensation professionals, we need to help businesses find the balance between the budget, comp mix and what does truly motivate employees. Call me Pollyanna, yet I think these things can co-exist.

[E James (Jim) Brennan]

Compensation design that ignores relevant laws and local customs is bad compensation process. When employees are guaranteed pay regardless of work output outcomes, the principal adjustment mechanism becomes termination. Comp designers need to be sensitive to the potential consequences of their programs in order to avoid systems designed for optimal circumstances with no GTH plan for Murphy's inevitable arrival.

[Ann Bares]

Mercedes:

I'd agree (and I'm guessing Gibbons - and Bloomberg - would as well) that compensation is not the sole factor at play here. And hard to argue that there was a failure of management at some level in the decision to pour that kind of money into what inevitably became fixed contracts. But I stick to the idea that there is a cautionary lesson for us here, in that there must be a balance between employee and employer needs and considerations in setting pay - pay decisions that put the employer at risk will ultimately come back to bite the employees as well. Any plan or program which promises to significantly alter the organization's cost base must be made with thoughtful consideration of potential impact and consequences.

I don't think its Pollyanna-ish at all to think we can balance these things - but it does take exceptional study, foresight and care. Hopefully, we're up to the task!

Jim:

No arguing that this was bad (perhaps unbelievably so) compensation process. You state it well and succinctly, I think, when you say "when employees are guaranteed pay regardless of work output outcomes, the principal adjustment mechanism becomes termination." Pay without risk, implemented without thought or consideration of possibilities and consequences, inevitably creates a different set of risks for the payees.

Thanks - both of you - for weighing in with your thoughts and comments!