Dealing with Good News

After two years of layoffs and hiring freezes, the economy is picking up. Employers are starting to think about where to go from here: Hire or hang tight? Offer raises or reserve that money for something else?

The amount of change affecting compensation and benefits has been unprecedented in the past two years. Both the economic crisis and major legislative developments such as health-care reform bring into question everything businesses do in managing these essential costs.

Four main components directly affect a companys people costs: cash compensation, health-care benefits, retirement benefits and workers compensation. These four cost categories are among the highest operating expenses for a company. In most healthy organizations, total compensation, or gross payroll, is the most significant business expense, amounting to 25 percent to 33 percent of revenue. And benefits typically make up 30 percent to 40 percent of payroll, according the 2011 Annual Study of Employee Benefits Trends by MetLife. These costs also directly relate to employee engagement and productivity, which drive the health and performance of an organization.

History shows us that once the economy bottoms out and neutralizes, employees start changing jobs. Already, were seeing significant movement in top management positionsthe CEO, CFO and vice president of human resources. These individuals are seeking new opportunities after shepherding their employers through a difficult time or gaining the experience necessary to move up and on.

Even those employees who may be staying with their current organizations because of the uncertain labor market may be disengaged. More than one in three employees (36 percent) surveyed by MetLife in its Employee Benefits Trends study said they hope to work elsewhere in the next 12 months. Only 47 percent say they have a strong sense of loyalty to their employera three-year low. Employers consistently underestimate how significant salary and benefits really are in driving employee loyalty and engagement. While company culture plays a big role, employees rank culture as a less significant factor when compared with the tangible aspects of total compensation and rewards.

How do employers keep employees from moving on and costing them a great deal in training and lost-opportunity costs? Money and benefits. Those considerations will keep employees around, even if they are less than satisfied. Employees also value transparency and communication, even when firms have to make tough decisions. Best companies win employee praise when they explain what they are doing and why.

Salaries have fallen behind in some businesses as a result of the economic downturn. Many companies chose to forgo salary increases or offered only small ones over the past few years. However, their competitors may not have done the same thing. In fact, actual salaries have continued to increase for many jobs during the downturn, albeit at a slower rate. Now is the time for employers to review their salary structures and determine if they are in line with their companys compensation philosophy. They should also consider how the company wants to be compared to its competitors compensation practicesat the high, middle or low end.

Many companies are also experiencing a new-talent shortage, similar to one felt before the recession. During the recession, so few entry-level positions were filled that there are now few people in those positions to promote as more senior employees move on. Employees are leaving as opportunities open, other employees are retiring and hiring freezes have cut into the pipeline.

What should employers do? Ask these questions: How competitive are your salary practices? (Determine this by looking at market position, annual adjustments and whether you have, or even want, a method to establish internal equity.) Are you ready for the new-talent shortage? What will you do to fill new openings as people move up and on?

Look inward and shore up what you have. While many employers spent the past two to three years doing triage without much long-term planning, its time to look forward again and to move from survival mode to a strategic approach.

Nita Petry ([email protected]) is area president, Washington state, for Gallagher Benefit Services Inc., a subsidiary of Arthur J. Gallagher & Co.