Compensation Systems in Times of Uncertainty

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Svetlana Graiche, Ward Howell consultant, shares her views on the response of Russian companies to the recent events and why it is different from the situation of 2009.

The vast majority of survey respondents confirmed that bonuses for 2014 will be paid in full, and that there are no plans to significantly change compensation systems in 2015. This is consistent with comments from companies in other sectors (retail, telecommunications, etc.) – no one is planning significant or sharp changes to their compensation schemes.

There are several factors that led to such considered decisions.

One is how companies are ready to handle the recession. The last crisis caught everyone by surprise; many companies were not ready for the new reality and made spontaneous and unsystemic decisions. But companies learned their lesson in the 2008-2009 crisis, and in the current uncertainty react in a fundamentally different way: many have several development plans and scenarios for specific events. The leadership teams are a united front, ready to face any challenge and make coordinated, systemic decisions.

Another very important factor that contributes to companies’ confidence about maintaining the same compensation scheme is that employee and manager compensation in Russian companies has been in the national currency, rubles, for a long time. In the late 1990s/early 2000s, salaries were quoted in so-called “conventional units,” which were most often US dollars. This was done particularly for top management and for employees at Russian subsidiaries of Western companies. However, the stability of the ruble’s exchange rate and the introduction of new Russian labor legislation in 2005 led salaries and bonuses for the vast majority of the Russian workforce, including those in the above-mentioned categories, to be fixed in Russian rubles. Therefore, the ruble’s sharp decline at the end of 2014 had virtually no effect on allocations for employee compensation. Many companies have, therefore, even increased their budgets for 2015 payroll, sometimes by as much as 10-12%.

Therefore, the ruble’s sharp decline at the end of 2014 had virtually no effect on allocations for employee compensation. Many companies have, therefore, even increased their budgets for 2015 payroll, sometimes by as much as 10-12%.

The situation with raises, which often depend on the accomplishment of key performance indicators (KPI), is two-fold. Some companies benefitted from the ruble’s weakening – income from exports positively affected revenues and contributed to the achievement of KPIs. However, companies that were dependent on imports suffered – the weak ruble resulted in a further increase in expenditures, and key business targets were frequently not met. In both situations, companies made logical and reasonable decisions: preserve the fundamental KPI parameters, and abide by previously discussed salary agreements. No company that we know of radically revised their systems of motivation, even retroactively.

In reviewing their compensation systems for 2015, companies were prudent and careful. Changes were introduced selectively and only for future periods; for example, stricter KPI targets for 2015. The KPIs themselves could be subject for review as well: earlier, companies were focused on capital growth, increased revenues and market share, but starting in 2015 the focus has, for good reason, shifted toward improving operational efficiency and increasing productivity (revenue per employee, operating margin, return on investment, etc.).

In addition, the management of several Russian companies plan to freeze their own salaries or even decrease them by 5-10%. This is similar to what international companies did during the 2008-2009 crisis, which affected companies in all countries. Back then, many American and European manufacturing companies froze or reduced top management salaries. Many managers either reduced or completely refused annual bonuses, even if their KPIs entitled them to certain benefits. In doing so, top management demonstrated to investors their understanding of their responsibility to the company’s overall results in a time of global economic uncertainty.

It is also interesting that many Russian companies in the current situation plan to increase their budgets for employee development. This is one example of a balanced approach to managing motivation and compensating personnel. In the case of a hiring freeze, development and internal promotion becomes the correct and logical next step, one that has a direct effect on increasing the motivation and loyalty of personnel. This helps build trust and loyalty among employees, and improves the employer’s brand even in the current difficult economic situation.

This article was published in the special edition of the Talent Equity Newsletter, "Manufacturing. Is there a crisis?".

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