As the rays of global economic recovery break through the long night of recession, it’s becoming clear that, even as markets improve, things may never be the same. Driven by stringent cost-control measures, companies have faced the downturn largely through the lens of their compensation and benefit strategies. Now, however, a reconsideration of the total rewards approach seems an appropriate strategy for 2010 financial planning and for the post-recession era—indeed, what we call a “new normal” for rewards is on the horizon.

This new normal is potentially a more sustainable way of focussing the total rewards strategy, which combines base salary, benefits, training and career development, and work lifestyle into a total value proposition for employees, and which has always been defined by four overlapping perspectives:

Figure 1. Developing a total reward strategy

At the top of the economic cycle, when profits are high and there’s competition for talent, the balance of power shifts to the employee. Thus, the dominant perspectives driving the total rewards approach are those of the employee – who can command the maximum compensation, benefits, training and career development opportunities for his or her skills – and the pressures of a tight external labour market, all of which drive costs higher.

At the bottom of the economic cycle – where we continue to sit, despite indications that the upturn is in sight – the dominant perspectives become those of the employer, which must limit headcount and hiring, and those of cost, which must be contained through limits on salary, benefits, and other aspects of the total reward proposition such as training budgets and career advancement opportunities.

The key, therefore, to creating a sustainable total rewards framework lies in achieving a balance of these perspectives regardless of the economic climate. But as the recession eases and the financial upswing gathers momentum, will your firm revert to an emphasis on the employee/external market perspectives – that is, go back to old habits – or will you sustain the good investments and prudent approach to total rewards brought on by the downturn? Will you embrace a new normal?

Some recent Mercer research sheds some light on how employers in the UK are coping with these issues, and with the recession in general. In our recent Leading Through Unprecedented Times survey of employers worldwide, for example, more than 80 percent of UK employers expressed moderate to significant concern regarding their plans for 2009 and 2010 merit increases. This is not surprising, given the economic climate, as many organisations have adapted either across-the-board (33 percent in our survey) or by-segment salary freezes.

In other Mercer research, we’ve found that 64 percent of surveyed UK employers have made changes in their total rewards mix between 2008 and 2010, as the economy has made a massive impact on how companies are thinking about and managing rewards. Drilling down into these statistics, we found that 60 percent of survey participants have changed their compensation mix, with about 50 percent of those having reported an “increased emphasis” on compensation, which we interpreted as an increased emphasis on the bottom-line ramifications of instituting any salary increases, freezes or reductions, since many organisations view compensation separately from benefits.

In this context, it’s clear that companies have reacted to the recession by exerting their control in the major cost areas, primarily by holding the line on salaries, headcount, new hires, and a mixed bag of other controls that typically include cutbacks in total rewards components such as benefit costs (requiring, for example, a higher level of cost-sharing for benefit offerings) as well as training budgets and promotions. But the inevitable economic upturn will only bring renewed pressure on these aspects of the reward picture, as a tightening job market requires more competitive measures to ensure that firms have the right and sufficient workforce in place for growth as the economy improves.

What, then, can companies do now to prepare for the upturn? If there is to be a sustainable new normal in terms of total rewards, then companies should look at the key components of their total rewards mix from a fresh perspective. Looking at the four quadrants of the total rewards strategy, companies should consider the following:

Figure 2. Companies reconsider their approach to total rewards

As the tide of global recession turns, it’s vital that organisations avoid repeating the mistakes of the past, when their perspective on rewards was driven almost entirely by employees’ high expectations and the dynamics of the market. The post-recession era must be a time of sustainable rewards strategy – a new normal that will ensure a balanced response to any economic reality.

This article is based on a presentation given by Mark Hoble and Milan Taylor at the UK HR conference, held in London on 1 July 2009

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