Get Ready for the Coming Collision of Compensation and Demographics

People Don’t Understand the Demographics

Companies tend to relax about compensation during an economic downturn, but that may be a mistake, says Dorf, who is managing director of Compensation Resources, Inc. in Upper Saddle River, NJ.

“I don’t think people understand how demographics fit with this recession,” Dorf says. The number of people who are going to be retiring soon is dramatic, he adds. Because of the recession, a lot of people put off retirement.

Unfortunately, that means that as the economy improves, there will be a huge number of retirements, including many of your most experienced people. A mad scramble to hire whoever is out there will follow.

“It’s all about supply and demand,” Dorf says. You have to figure out which of your people are the most critical, and how to pay them so they want to stay. At most companies, he says, “The assets go home every night. You’d better make it attractive enough for them that they want to come back in the morning.”

Companies have been freezing compensation, or giving very small increases, or even taking compensation away. But this year compensation budgets are up a little over 3%, Dorf says, and that’s not considering cost-of-living adjustments built into many union contracts.

But how can you keep those key employees with so low a budget?

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Using Small Increase Budgets Strategically

Even with a small increase in the pay budget, Dorf says, give a lot of thought to how you can use what you have to meet the company’s goals. “For years we have espoused the idea that you should stay away from automatic increases, opting instead for increases based on performance,” he says.

Dorf is still opposed to automatic increases, but now he has stopped using the term “pay-for-performance” and started using “pay-for-results,” because results are what you want. You’re looking for improvements in performance, improvements in profitability, improvements in customer service. The pay program should target the specific results you want to encourage.

We like to tell clients that a good way to handle performance evaluations is by exception, Dorf says. There are many people whose performance is in the middle, and that’s fine. But what I really care about is the top and the bottom.

First, which people are at the top of the pile? You can tell clearly which ones are the most valuable, the most dependable, the most flexible, whatever it is you value. Those are the people you’d better do something about hanging onto.

Take sales, Dorf says. He always hears a variation of this statement: 80% of our business comes from 20% of our sales people. What that really means, says Dorf, is that “you’d better make sure that 20% is locked in and never leaves you.”

Remember, Dorf adds, simply because unemployment is high doesn’t mean that the available workforce has the skills you require.

And next, determine who’s at the bottom of the pile, that is, the ones you find to be more problematic, the ones you can’t count on, the ones who make more mistakes. You have to figure out what you can do to help them, or maybe you have to get rid of them.

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But We Have a Limited Compensation Budget

How can you lock top performers with this environment of limited compensation budgets?  It’s hard to make major inroads because you don’t have the cash,” Dorf explains. But you can differentiate, he adds.

The people who are not producing are not going to get any increasesand that means the people who are producing at a nominal rate can get a small increase, and the people who are producing at a high level can get a bigger increase.

After a few years of differentiating this way, you’ll really start to see the difference, he says.

In tomorrow’s Advisor, expensive mistakes your audit may find, plus an introduction to the “Compensation Bible,” Employee Compensation in [Your State].