The economic downturn of the past year has had a definite impact on organizations that will translate to a change in talent management over the next 18 months. Moving forward there will be five talent management imperatives organizations will need to follow if they are to succeed.
Not surprisingly, total cash (salary plus bonus) and total direct compensation (total cash plus long-term incentives) for executives reflect economic conditions. In 2009, reductions in total cash and total direct compensation were experienced by many executives, including CEOs, CFOs, Top Legal and HR positions. The median percentage decrease in total direct compensation was most significant for CEOs (-17%), followed by Top Legal (-10%), Top HR personnel (-8%) and CFOs (-5%). Total cash compensation change again was greatest for CEOs (-8%) and relatively similar for CFOs, Top Legal, and Top HR executives (-4, -3, and -2%, respectively). (Source: Canada Compensation Data BankTM General Industry Executive Database).
Global salary freezes occurred in 2009, as well as other significant efforts to reduce or minimize workforce costs. In Canada, nearly half of employers implemented salary freezes in 2009, although only 11% anticipate general salary freeze in 2010. The estimated median salary increase for Canada in 2010 is 2.5% (Source: Towers Perrin survey, Compensation Strategies for an Uncertain Economy, 2009 - Canada)..
A recent Towers Perrin survey projected revenue declines for most global companies this year, but showed a “cautiously optimistic” opinion of the future. Canadian views on the timing of recovery are divided -- with one third thinking it will happen in the next 8 months, another third not until late 2010, and a final third not until 2011 or later.
Economic uncertainty has resulted in tentative leadership that has created anxious employees. Business leaders have noted that many employees are now postponing retirement (68%), moving to fixed-income investments (46%), requesting financial education or retirement planning (40%), and using employee assistance programs (26%) (Source: Towers Perrin Benefits in Crisis Survey 2009).
While some positive indicators have arisen in recent months such as the stock market rally and improved corporate profits, corporate challenges like potential further cost cutting and key talent shortages remain. Balancing future opportunity with current reality is difficult and many organizations are finding they need to rethink human capital priorities.
“Turnover Risk” remains a huge concern for companies over the next 18 months. Almost seventy percent of companies are concerned about retaining their high performing critical talent as a result of cutbacks made during the recession. This talent flight concern appears warranted as many companies indicated that they plan to increase hiring next year, and will almost certainly look at competing organizations in their industry or region as a possible source of talent. Companies reported high risk (hr) and moderate risk (mr) vulnerability for crucial workforce segments. Employees with skills in short supply and high demand were considered to be the greatest turnover risk (50% hr, 41% mr), followed by High Performers 35% hr, 54% mr), and Key Contributors / Technical Experts (30% hr, 48% mr).
This crisis and its related challenges also reinforce the need to immediately upgrade ineffective talent management practices. Organizational feedback regarding specific talent management practices and actions reveals on average a “neutral” effectiveness rating across categories. Career pathing and planning ranged from 38% ineffectiveness to 30% effective. Deploying key talent across roles/functions/regions ranged from 33% ineffective to 37% effective. Strengthening the talent pipeline and succession management had the most encouraging results with a 33% ineffective rating in comparison to a 40% effective response.
Aligning effective talent management with business priorities is crucial to leadership and top talent. Organizations were asked the degree of emphasis they would place on certain talent management priorities in the next 18 months in relation to their strategic business priorities. Performance management was regarded as a high priority for 61% of the respondents and as a medium priority for 34%. Assessing/developing high potentials and top talent was considered a high priority by 59% and a medium priority by 31% whereas assessing/developing senior leaders was deemed a high priority by 52% and only a medium priority by 38% (Souce: Towers Perrin: Managing Talent in Tough Times Survey, 2009 – Canada).
Increased attention on talent management is hitting HR from inside and outside the organization as senior personnel try to best meet the demands of their customers and investors. Those internal and external pressures are leading top performing companies to five talent management imperatives: 1) Ambidextrous Leaders, 2) Segmentation and Differentiation, 3) Simplicity and Consistency, 4) Ownership Shift to the Business, and 5) Talent Decision Science.
Ambidextrous Leaders are imperative to creating the next generation of engaging, global leaders by redefining competencies/attributes and development strategies. This economic downturn has caused employees to lose confidence in leadership and to have less clarity regarding longer-term company goals and objectives. It has also led a significant minority (36%) to potentially consider employment elsewhere. Leadership drives employee engagement and employee engagement drives organizational performance. The drivers of engagement – senior leadership, career development potential, company image, organizational values - remain fundamental and relevant to employees. Key leadership behaviours include developing insights into the workforce, fostering learning and setting career paths with purpose, cultivating pride and demonstrating care, informing employees and gathering their input, and recognizing efforts and optimizing rewards.
Embedding segmentation into the talent approach to differentiate investments is also imperative. Companies must segment or allocate human capital based upon expected rates of returns. Pivotal role analysis should be conducted to differentiate job families/duties that “affect” the strategy from job families/duties “affected by” the strategy. Talent segments and value should ultimately dictate potential strategic action moving forward. Strategic segments should be built up, core segments should be protected, support segments could be streamlined or outsourced, and non-core talents that no longer align with strategic direction should be re-directed.
Simple and consistent talent management is imperative to properly facilitating talent mobility. All too often different aspects of talent management are not connected and integrated, and are therefore misunderstood by both key talent and management. For example, competency models for behaviour, personal attribute considerations, performance history assessments, and responsibility readiness criteria should be fairly established and applied throughout the promotion process.
Establishing an ownership shift to the business is also important to business success. Companies must build line leader understanding and establish their leaders’ capabilities to own and drive talent management to effective action. For example, enabling managers to have real “career lifetime” discussions with key talent, including providing greater information regarding career paths, performance and potential earnings - will significantly change retention/engagement levels for key talent, and help create a “culture of talent” within management and the organization as a whole.
Talent Decision Science is imperative for defining an effective measurement system that correlates how talent management investments impact business performance. Companies must determine if their investments are focused on those who drive performance, if the differential between pay levels for top and average performers is right, and if their costs are delivering appropriate ROI. For example, at one organization, a Labour Cost vs. Financial Performance survey that was conducted over a 4-year period revealed: 1) compensation growth has significantly outpaced revenue growth and profitability, 2) benefits costs have recently stabilized, and 3) incentive costs do not appear to correlate with profitability growth.
So what should you do now? First, try to remember that the average recession typically lasts about 10.5 months, so don’t lose sight of positioning your company for eventual recovery. Remain conscious of the degree of alignment you have developed between compensation and your organization’s long-term plans. Review your rewards strategy to ensure it is sufficiently flexible to support your business in a more favourable climate. Challenge yourself and your team to adopt a broader perspective and to come to the table and discuss compensation in the context of talent management. Recognize talent management begins with a firm understanding of the work force, so consider how you can use your existing tools and resources to provide this broader perspective to your organization. Compensation often provides the tools for evaluating the ROI of broader talent initiatives. You are already skilled at thinking about costs, now consider how your team can provide objective, analytical assessment to add value to the organization.
Towers Perrin is a global professional services firm that helps organizations to improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. www.towersperrin.com