Considerations for Private Company Total Rewards in Response to the Great Resignation
The Great Resignation has been very disruptive and made a significant impact on the workforce. According to the Society for Human Resource Management, close to 50 million US workers left their jobs in 2021, an increase of 15 percent from prior years.
Additionally, the workforce has been increasingly mobile as people moved from expensive urban locations to lower cost of living areas with more affordable housing, less congestion, and opportunities for outdoor activities under pandemic-era telework policies. This labor market exodus and geographic dispersion, in addition to rising inflation, has caused a ratcheting up of pay among hourly employees all the way up to the executive suite. There has also been a lasting impact on people’s expectations for remote work and more flexible work schedules.
What can private companies do to remain competitive in this environment and be able to attract and retain the talent needed to run their businesses? From a compensation standpoint, the starting point is for pay to be competitive. Most companies made significant changes to their 2022 salary budgets. Across industries, the average merit increase budget grew from a ten-year historic level of 3 percent per year to 5 percent per year in 2022. Many companies made even larger salary increases for high-demand jobs or people with hard-to-find skills. In addition, there were larger annual bonuses paid in 2022 related to exceptional performance in 2021 as the economy rebounded from the COVID-19 pandemic; these annual bonuses should be more moderate in 2023, as inflationary pressures will cause an economic slowdown in the second half of 2022. The point is that private companies need to keep abreast of these economic developments and be quick to respond to keep pay competitive, especially versus their industry peers.
For executives, there is an increased focus on providing long-term incentive (LTI) compensation in private companies. According to the CAP-WorldatWork Incentive Pay Practices: Privately Held Companies report, about 60 percent of private companies offer an LTI plan to executives, with three-year, cash-based performance awards being the most prevalent vehicle. Private companies offer LTIs primarily as an executive retention tool, but other goals include aligning executives’ incentives with the owners’ long-term goals and competing for talent with other employers. The choice of LTI vehicle depends on company strategy. Long-term cash plans are favored by companies operating as going concerns. Real equity is favored by start-ups and high-growth companies, private equity-owned firms, and those moving toward a value-realizing event. Phantom equity is often used by companies that may have a value-realizing event in the future or that may wish to transfer ownership in the future for succession-planning purposes.
In today’s environment, the attraction and retention of talent is broader than just focusing on salary, annual bonus, and long-term incentives, however. Private companies can really differentiate themselves by an enhanced focus on “total rewards.” Employees care about other aspects of work that may not be directly compensation-related but have value to them. According to a recent survey by Robert Half, a global recruiting firm, the most appealing rewards are the following:
Flexible work schedules (compressed work week, flextime, windowed work)
Remote work options
Paid parental leave
Company-subsidized meals or snacks when working in the office
Paid time off for volunteering
Expanded wellness benefits
There is also a renewed focus on company culture and an organization being considered a “good” place to work. It has been difficult for companies to maintain their culture when balancing the hybrid work schedules of in-office time and work-from-home time. The concept of “corporate reputation” is also gaining importance as a deciding factor when choosing employers. The next generation workforce cares more about a company’s stance on climate change, racial and ethnic diversity, LGBTQ+ issues, and fostering an inclusive environment than previous generations. Private companies focused on these environmental, social, and governance (ESG) issues (including customers, employees, communities, and the environment) long before the topic became popular in business media. Now is the time for private companies to increase internal and external communication of their ESG efforts.
Many of these workplace trends may reflect a permanent shift. It will be a challenge for boards and senior management teams to adapt to the changing environment. Unfortunately, there is no easy answer or one-size-fits-all approach. Flexibility and creativity will be required to craft a total rewards package that is compelling enough to attract and retain the right talent for each company.
Susan Schroeder is a partner in the Los Angeles office of Compensation Advisory Partners. She is a 2022 NACD Directorship 100 honoree.