By Vicky Wright, Partner, Head of Performance and Reward Consulting, at Ernst & Young Human Capital (vwright@uk.ey.com)
2002 was a lively year on the compensation and benefits front, and there is little sign that 2003 will be any easier. Two issues that hit the headlines were executive remuneration and pensions, but there have been other less high profile matters to face - low salary increase budgets, incentive plans which do not meet the needs of new business realities, and insourcing/outsourcing decisions regarding remuneration management.
The corporate failures in the US, and the attendant scandals regarding gains realised by executives through share options before the collapse in stock prices, have sent warning signals about incentive design to shareholders and HR Directors, as have the legislative developments in the US that reach into the governance of UK companies.
Prompted to act by the growing furore, the UK Government brought forward regulations giving greater powers to shareholders in respect of executive remuneration policy review, and requiring companies to disclose more about the make up of executive pay packages. Many Remuneration Committee Chairmen are now waiting apprehensively to see whether these new shareholder powers will be exercised responsibly, and with due regard to the difficulties of attracting and retaining top talent at this time of economic volatility and uncertainty.
There are certainly signs that executive remuneration policy will be changed as a result of the heady mix of falling stock markets, lowered growth prospects and shareholder activism. It is unlikely that many executives will enjoy multi-million pound gains through share options in the next few years, and the stretching nature of performance requirements in restricted share grants are unlikely to make these an easy touch even for those executives who outperform their competitors.
All the hype about executive remuneration means that many other developments in the compensation scene have less air- time than their significance justifies. Pensions have hit the headlines, but the Government is taking its time in dealing with a difficult problem which will have a profound impact on the workplace. The press and union outrage at the widespread closure of defined benefit pension plans masks a fundamental problem about provisions for retirement funding in light of longer life expectancy and a growing pattern of early retirement in the mid 50's.
I recently heard the compensation and benefits manager of a FTSE 100 company remark that he had spent 80% of his time on this issue in the past 12 months - and still there was no sign of easy resolution in his organisation. There have been many 'knee jerk' reactions to the pension issue, and many companies (and their employees) seem to have rushed into 'solutions' before fully examining the problem. Merely closing a defined benefit plan to all new entrants and introducing a modestly funded defined contribution plan for future employees creates a two- tier workforce which will be difficult to sustain in the long term. For many organisations a more creative approach involving changes to existing plans - which recognise that several past pension promises are unstainable for those with many years of prospective employment still ahead - as well as introducing more flexible new arrangements will be needed to produce a fair balance of benefit, cost and risk to employers and employees.
The pension issue has come at a time when many organisations have focused on improving the value and effectiveness of reward by allowing employees to tailor their own compensation and benefits package. Organisations using this approach report a significant increase in employee satisfaction with reward and extensive use of the choices available by participants, with up to 85% of employees choosing to make changes to their package when given the opportunity. There has been a rapid expansion in the use of flexible benefits and total reward approaches. Once a good theory which was prohibitively costly to implement in practice, reward 'flex' has been made easier by the development of IT systems which allow employees to serve themselves, and the arrival of outsourcers able to handle the 'back office' routine at low cost.
With so much of the HR spotlight falling on compensation and benefits matters in 2002, but with so many of the issues unresolved by the year end, 2003 is expected to be another busy year. We can also hope that it will be a year when there are creative and positive solutions to 'unfinished business'.
This article was first published in the January 2003 issue of People Matters.