Information is power

By Ali Kursun, head of Global Insights at Mercer

The amount of information organisations are exposed to is huge and growing exponentially. They clearly need information on which to base decisions – but it needs to be the right information, distilled and sifted from the morass. The health of an organisation reflects the quality of its decision making, and the quality of its decisions depends on the relevance, robustness and reliability of the information it uses.

Compensation planning is a critical business process – and even more so during an economic downturn when you have to keep talent engaged, motivated and productive despite a much smaller pay pot. So having relevant, robust and reliable information is crucial if organisations are to make sound decisions on pay.

Organisations need to know about the state of the market, where it is heading, what their competitors are doing and so on. If they don't keep abreast of market movements they are potentially exposing themselves to some very big risks – not least that their key performers leave just when they need them most. That might be because they are demoralised by low pay, or because competitors are exploiting the employer's lack of market knowledge and salary competitiveness with aggressive poaching tactics. Even if people don't leave, paying the wrong salaries has a strong effect on employee engagement, which will affect medium- and long-term performance.

While companies imposing pay freezes or pay cuts think they are minimising their risk, they may, ironically, be doing just the opposite. And risk lies not just in under-paying either. Firms can damage their competitiveness by over-paying too. If the market is paying 3 per cent and you are awarding 4 per cent, that one percentage point discrepancy on a $100 million dollar payroll can add up to a lot of wasted money.

In our increasingly knowledge-based economies information is taking on 'utility' status akin to the organisational plumbing. Companies that don't keep that information maintained and up-to-date – particularly in a recession when they are especially vulnerable – could find that their organisations spring some very expensive leaks!

Why organisations need relevant and timely market data
Organisations need market data, whatever the state of the economy. But it is probably never more critical than during an economic downturn when every penny spent on pay has to really count. Relevant and timely market data is essential to sound decision making in the following areas.
Base pay	Don't assume, just because you have frozen your base pay and you see others doing the same, that your relative market position remains unchanged. Despite what may be billed as a blanket pay freeze, there are nearly always 'special cases' in organisations that require base pay to be adjusted. What's more, employers may be hiring key new staff at a higher rate than that for existing staff.
Relative market position	Even if you can't afford to award base pay increases, you need to know your relative market position so that you can, if necessary, compensate by increasing the emphasis on other elements of the reward package.
Variable pay	Changes in variable pay are less easily tracked than base pay movements, but organisations that freeze base pay may increase the potential for variable or performance-related pay if they think it will motivate employees to deliver recession-bucking performance.
Total rewards	Even where there are pay freezes, the cost and value of retirement and health care increase, because the pricing is outside employers' control. So organisations that provide above-average benefits could maintain or even improve the relative value of the total rewards package during pay freezes. But you can only establish this through robust data analysis.
Restructuring	As organisations slim down, some people are given more responsibility and others brought in from the outside. They might accept a position on uncompetitive terms in order to gain experience, but will move on for better pay at the first opportunity. You need robust market data to effectively manage both situations.
Communication	Understanding an organisation's relative market position versus its desired market position enables HR and reward professionals to provide targeted strategic support to help retain key employees. Likewise, data might show that an organisation is being unnecessarily defensive about what it believes its relative market position to be.

*Average pay increases in Western Europe**
2008 3.7%	2009 2.6%	2010 (forecast) 2.6%
* For all employee categories combined Over 50% of surveyed companies in Ireland, Sweden and the UK reported pay freezes for 2009. Source: Global Compensation Planning Report

About the author

Ali Kursun is a principal in Mercer's information product solutions business, focusing on global workforce information and insights. Based in Geneva, he can be reached at +41 22 869 30 03 or ali.kursun@mercer.com