Designing compensation for the new realities.

• Author: Beal, Richard F.
• Position: Special Section: Compensation

Compensation has changed dramatically over the past few months. In just a short time, employers have shifted gears - from tackling attraction and retention problems, to reevaluating their compensation expenditures. Even before September 11's effect on the economy, recession fears were causing many employers to make cost control and balanced budgets top priorities. Since salaries and benefits represent a huge proportion of corporate spending, it was inevitable that human capital investments would become a focal point of those efforts.

This emphasis on cost-containment has put employers in a very challenging position. With most economic analysts predicting an eventual rebound, employers must be careful not to take steps today that will jeopardize their firm's future competitiveness. This means they must balance short-term goals of reducing compensation costs against their long-term concerns about employee morale, attraction and retention.

It's unfortunate that some companies have been fooled into thinking a long-term approach to compensation is unnecessary because the labor shortage has eased. Some managers are responding to recent events with the belief that employees should be happy to have jobs, and that concerns about managing human capital are old news. In reality, the current softening in U.S. labor markets is most likely just a temporary dip in what will continue to be an historically tight job picture for decades to come.

Even more critical for employers is the fact that during the current decade, the growth in the labor force will be much slower than during any recent decade. In the 1970s, the growth rate was around 2.5 percent, compared with 0.75 percent projected for this decade. Add to that the Baby Boomers nearing retirement, and it's apparent there just won't be enough young talent available to fill their shoes. Factor in the millions of new jobs that will be created as the economy recovers, and it's clear companies will continue to face a severe labor crunch for the foreseeable future.

In practical terms, this means that employers cannot afford to lose sight of the big picture. Attracting and retaining employees with critical skills will remain a challenge and compensation strategies will need to reflect that reality.

In response, many employers are taking steps to address short-term needs without jeopardizing their long-term interests. Many are balancing staff reductions with across-the-board cuts in bonuses and pay raises...