Thawing The Salary Freeze

At what point do you have to do something?

At a recent conference that question was posed to me. Actually the individual asked, "Phil, when you have had your salaries frozen for awhile, how long can you leave them frozen before you reach the point that you have to do something?"

Of course with a question like that I assumed that the organization he referenced had frozen salaries for more than a year. So I asked "how long have your salaries been frozen?" His answer, "three years." With that answer my response was, "I believe you are at that point."

As we all know, many organizations have instituted salary freezes during the recent downturn. Some have instituted freezes for one, two or in this case three years. Depending on the source you reference, during the worst part of the recession as many as 40% of organizations instituted a salary freeze of some duration. Because salary freezes were so widespread, it was easy to feel secure in thinking that everyone was experiencing a freeze situation. After all, misery loves company.

However, it is easy to forget that if 40% of companies instituted a salary freeze, then 60% didn't. And the duration of every freeze was not the same from organization to organization. Depending on your specific sector and the types of skills and talent you require in your organization you could find yourself in a very uncompetitive situation.

Salary freezes instituted in organizations rarely mean that all salaries are frozen. Unfortunately, salary freezes are often accompanied with reductions in force, which result in job combinations and individuals being asked to "wear multiple hats". In these cases it is difficult to ask "Karen" or "Sam" to take on an additional role without some salary increase. Depending on how widespread this takes place in the organization the internal sense of fairness or equity among jobs can be significantly impacted. Even in difficult times, such as recent days, some employees leave for other positions or for family requirements. When this happens often a new individual is hired and may actually be paid more or less than incumbents in comparable positions, leading to compression or other perceived inequitable situations. Some areas within the organization may be performing well, but have had to "share in the pain" as a good team player, or conversely has been able to reward as if they were a standalone entity while the rest of the organization suffered.

As most organizations are now effectively answering the question of "at what point do you have to do something", probably a more important question is "what should we do now"?

We have clients that have weathered the economic storm very successfully and have been managing reward almost as if there was no downturn. While others have instituted freezes, but are now moving forward away from the freeze situation.

One of our clients does an excellent job of managing compensation with a long-term perspective with annual reviews and adjustments consistent with the long-term plan. They too instituted a freeze, but have now moved forward with the approach needed for 2011. In reviewing their situation they determined that the base structure currently in place was maintaining the desired competitive position in the marketplace and the decision was made that no movement in structure was needed. With appropriate internal analysis it was decided that more focus needed to be directed at correcting some internal issues around compression and perceived inequities within certain job families and operating divisions within the organization. So the overall salary increase budget was developed to channel funds into those areas where adjustments were needed.
Another client determined that a standard salary increase number would be applied across the organization but held back a small percentage to be used to reward better performers and to more closely move the base salary structure to stronger recognition of performance.

In both cases these decisions were made after appropriate analysis of both the internal and external situation at the organizations.
Some things to consider when you are coming out of the freeze:

1. Evaluate your current internal situation. Are certain areas or jobs within the organization more "in need" of additional funds than others?

2. Have certain parts of the organization followed a different approach in managing reward during the freeze?

3. Is the structure still where you want it to be when compared to the appropriate market?

4. Have new hires or combinations of positions due to restructuring caused internal inequities between positions?

5. Have you appropriately identified and rewarded the top performers?

Coming out of the freeze with limited resources should not mean everyone gets something. With appropriate internal and external analysis sound decisions can be made regarding the allocation of limited salary funds. But, we must be willing to think differently and make some decisions that we might not want to make.

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