Practicing innovation to counter declining wage growth budgets

In response to the recent article in this space about declining wage growth rates in 2024, questions arose about what effective leaders can do that is “out of the box” to maintain employee productivity and engagement in a world that still has skills and labor shortages. in many areas.

As a reminder, WTW’s recent Global Wage Budget Planning Report 2024 reveals the movement of wage budgets around the world in the second half of the year. As WTW’s Russ Wakelin reported, actual wage increases in 2024 are lower than planned in many countries, and planned increases for 2025 are lower than 2024 increases.

As organizations must continue to engage employees, effective leaders are considering alternatives to traditional programs. WTW’s Trey Davis recently wrote about the critical roles of innovation and creativity in payment programs. Effective leaders take the following actions:

1. Use disciplined principles of innovation – Effective leaders use a disciplined innovation design approach to discover and design the most appropriate solutions for their organizations, such as that outlined by Tony Schwartz in Harvard Business Review’s “How to think creatively.” Key components include “saturation” (fully defining the problem, challenge or opportunity and absorbing all available information), “incubation” (thinking deeply about the problem or opportunity and incorporating all available information), “introspection/evaluation” (ideating and defining the ideal concept , which often involves giving up and coming back to the problem later) and “verification” (like a scientist in a lab, testing the solution against various factors, which may include the business context, employee needs, math, accounting, regulations, tax rules, and disclosure ). Within the overall process, the saturation stage may be the most important because the success of the innovation process requires both a clear definition of the problem or opportunity and a deep understanding of all related aspects.

2. Get the facts – Effective leaders understand that the innovation process requires deep knowledge of topics and context, including industry dynamics, national and local rules and regulations, business life cycles, strategic business priorities, competitive strengths and weaknesses, workforce demographics, preferences and employee performance and desired culture. The process also requires an understanding of the dynamics of the relevant labor market(s), where talent comes from, where it is lost and what motivates them. It also requires technical expertise to assess plan outcomes under both expected and unlikely conditions, accounting treatment, perceived value, administrative complexity, tax ramifications, as well as relevant external factors such as the regulatory environment and potential stakeholder reactions.

3. Create programs to fit the organization’s unique needs and circumstances – Effective leaders apply creativity and innovation to pay practices, often moving from “market practice” or “leadership practice” to “best fit.” This means identifying the optimal solution to address a specific problem or achieve a set of goals aligned with specific workforce needs and seeking to maximize the return on investment for that specific problem or set of goals.

4. Embrace atypical design features – In the process of developing an optimal solution, effective leaders adopt plan features (such as production and performance bonuses) that are tailored to specific workforces or countries. Additional examples include offering only base salary and stock options without short-term incentives (Netflix), setting significantly wider performance ranges in incentive plans (Spectrum Brands), offering a choice of payment devices (Iron Mountain, Tapestry, Netflix) and Career Grant. actions (Lear). Effective leaders neither adopt nor avoid unusual traits simply because they are unusual.

5. Involve stakeholders in salary design discussions – Effective leaders engage their boards and even key investors in discussing the rationale and other details behind innovative pay programs. When managed effectively, unique pay practices do not result in negative stakeholder reactions. In fact, the most recent say-on-pay resolutions for the five companies above were approved by 92% of shareholders, on average.

6. Focus on an integrated approach to payment programs and spend wisely – WTW research also shows that leaders are changing how they approach pay programs in 2024, such as adopting a more integrated approach to base pay, short-term incentives (including annual bonuses or sales compensation plans), and long-term incentives (such as stocks). programs). WTW’s Lori Wisper recently wrote that these actions — along with updated pay philosophies and a focus on pay equity — reflect leaders investing in pay more strategically to attract and retain key talent.

7. Focus on execution – Effective leaders understand that program implementation, communication and administration influence how employees perceive and embrace pay programs. While research shows that only 21% of organizations have effectively communicated compensation programs to potential employees, effective leaders create an advantage by communicating pay programs in a meaningful way with confidence that the programs are well designed, managed and governed.

Effective leaders apply an extensive body of knowledge and experience to move beyond market practice to generate innovative solutions that provide the best fit for the organization and its unique strategy, life cycle stage, culture and objectives.