Leadership: HR shape the next normal

Una Diver, Partner at Ernst and Young, provides insights into how organisations are refocusing their remuneration strategies as they look to the future.

New Zealand is in a different place from what it was a year ago. We’re moving away from risk management toward a new optimism, with most pundits generally predicting a continued recovery and a buoyant economy. The growing pains associated with this resurgence offer a new set of challenges to be negotiated by organisations and their HR functions.

Our experience suggests that companies operating a ‘back to normal’ approach will either miss the significant opportunity to transform or face ongoing people challenges. Organisations that grasp this opportunity will not return to normal but will reframe what normal should be. HR functions have the potential to be central to realising this transformation.

As difficult as the COVID-19 pandemic has been, the disruption presents an opportunity for organisations to reimagine their workforce for the future.

Remuneration budgets – a war for talent in the engine room of companies

During 2020, almost a quarter of organisations either cancelled or postponed their annual remuneration reviews.

However, that was then and this is now. Our latest COVID-19 Pulse Survey (July 2021) indicates that most organisations are going ahead with their annual reviews as normal across all levels and roles, reflecting a return to a degree of ‘business as usual’. Of these, only 1 per cent of organisations anticipate having reduced remuneration budgets this year.

While many organisations are increasing remuneration budgets, a shift in spending patterns is occurring. Consistent with the competitive talent market, more organisations are increasing remuneration budgets for roles below the executive or senior management level.

This concentration of spend in the ‘engine room’ of organisation structures reflects the necessity for companies to retain key skills and people to enable the achievement of recovery and growth aspirations.

In comparison, executive pay has been somewhat constrained. Instead, a considerable amount of time is being spent reconsidering shortterm and long-term incentives and adjusting them to accommodate the new trading conditions.

Those organisations that encountered considerable disruption during the COVID-19 crisis are rethinking their approach to incentives (particularly STI schemes), with 22 per cent of organisations in the process of making changes at the time of our July survey. The most prevalent of these are changes to the weightings of metrics or the remuneration mix.

Retention, better alignment with business strategy and simplification of remuneration frameworks were cited as the main drivers for change.

Below the executive level, certain scarce skills are commanding a remuneration premium, indicating organisations are more aware of the need to use remuneration as a retention tool.

Despite this, we have not observed the common American recruitment practice of sign-on compensation (cash or shares). We may see these emerge as the next weapon, if this war for talent continues.

Challenges around recruitment and retention

The borders are shut, so talent retention is even more crucial than would normally be the case. Fifty per cent of organisations in Ernst and Young’s March 2021 COVID-19 Pulse Survey cited retention as their main people priority, but, by July, a 13 per cent increase had occurred in organisations listing retention as a priority.

Organisations appear to be focusing on employee wellbeing (70 per cent), engagement (57 per cent) and non-monetary rewards (reflected in 20 organisations providing more development opportunities) to enhance retention while maintaining a focus on fixed remuneration. In the current competitive talent environment, effective talent strategies are critical.

In addition to concerns around retention, 83 per cent of organisations say that the border closure has affected their business and talent pool (20 per cent increase from the March 2021 survey).

Almost 90 per cent of respondents say that their access to talent is affected, and more than a quarter are seeing the effect of the border closure on retention.

Balancing remuneration cost considerations with the need to attract and retain staff has led many organisations to pursue the optimisation of their employee benefit schemes or employee value proposition (EVP).

EVP is a good way to support employees in a more personalised way during uncertainty and to deliver on what they value most.

While the focus is currently on life after COVID-19, continuing

uncertainty and the lingering results of social and economic disruption mean personal and professional stress levels will remain high for many. We’re seeing organisations continuing to tweak their flexible working arrangements and expand their wellness package offerings in an attempt to differentiate themselves in this tight market.

Checking the pulse of your EVP

Ensuring your EVP remains focused and is delivering a strong return in investment is paramount.

Rise of agile

You don’t have to go far before you hear someone talking about how their organisation is embracing agile practices, either across the board or in parts of the business.

Managing job structures under agile is harder than it looks. Both flatter team structures and less defined role responsibilities limit the ability of traditional job evaluation methods to accurately reflect relative job sizing. When the shortage of good agile skills is overlaid, this can create a remuneration headache as you grapple with what to pay these ‘hard to define’ roles.

If your organisation is adopting agile practices, it may be time to critically review how your current remuneration framework fits with the new approach.

Having designed agile pay structures for several organisations, we know it’s possible to achieve a structure that provides the appropriate levels of transparency and flexibility. Don’t panic, the data is out there, but you will need to engage with your provider to make sure you have the information you need to set the right rates. You’ll also need to consider the ‘what and the how’ of career progression, because your current performance management cycles and processes may not fit with the agile approach.

Resurgence, remuneration and recruitment

The closed borders have had an immense effect on the market for talent. With limited access to international talent, organisations have had to turn to the local market, resulting in an increasingly ‘hot’ remuneration landscape. Pay is being used as a means to both retain scarce and critical skills and attract much-needed talent from other organisations. We’re in the midst of a landscape peppered with retention bonuses and counteroffers, creating internal equity challenges that are a pain to manage.

This has prompted a rethink in how organisations approach their reward structure to retain good people and attract the talent they need. We have seen organisations take a variety of approaches: wait and see, get out the chequebook, or embark on true transformation.

What’s your approach going to be?

Are you ready for these challenges, or are you ‘digging in’, ready for a war of attrition?

In our view, the following elements are important for the ongoing development and maintenance of your EVP.

1. Align your EVP to the culture you are seeking to foster and embed.

2. Frequently re-evaluate your EVP to ensure the ongoing effectiveness of programmes based on employee preferences and costefficiency.

3. Get employee feedback on how they value the different benefits offered by your organisation. This is vital for knowing what your employees’ value most and what benefits are not held in high regard.

4. Consider implementing flexibility and employee choice in your organisation’s EVP design. This lets you accommodate employee preferences and adapt to shifting economic circumstances.

5. Demonstrate a bold statement about the type of organisation you are through your EVP – don’t be afraid to stand out.

Una Diver, Ernst and Young Partner, People Advisory Services, has two decades of experience in addressing the challenges inherent in managing HR and remuneration in New Zealand organisations. Una is considered a leading expert in remuneration practice within the New Zealand market. She applies a tailored approach in each case. Specialising in practical, cost-effective remuneration solutions, she has delivered solutions in all areas of remuneration strategy, executive remuneration, tailored incentive design, and the design and implementation of practical remuneration frameworks and solutions. EY provides regular insight into the remuneration market via REMonTAP and other surveys, they can be contacted for further information on surveys@nz.ey.com.