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Improving Employee Value Proposition during a Pay Freeze

When companies are faced with economic and financial challenges, the knee-jerk reaction is to deploy cost-cutting measures. With the increase in operating costs, the daunting challenge for HR is to ensure that Staff Cost to Income ratio remains at sustainable levels, while also keeping an engaged workforce. The options typically hover around rightsizing, pay-cuts, recruitment freeze and pay freeze.

Pay freeze, commonly known as salary freeze or pay flattening refers to a company’s policy of maintaining current pay levels for some or all categories of employees for a period of time.

A pay freeze can mean “business as usual” for companies that do not typically increase pay.  Conversely, for organisations that are driven by annual and promotional increases, this can pose a major change management issue, impact employee engagement and overall business performance if not properly managed.

This article explores various reasons and forms of pay freezes, possible effects and options for enhancing employee value proposition, even in “drought”.

Reasons for Pay Freeze

Organisations adopt pay freezes for the following reasons:

Restructuring: Some organisations carry out restructuring through mergers & acquisitions, while some make structural changes to optimise resources and adapt to the changing business environment.  These project types have a time span of about six months to one year or even longer periods in unionised environments and to this end, some companies freeze pay, as a temporary measure until key and informed decisions are taken.

 Pay Market Practice: Organisations may adopt a pay freeze to:

  • Adjust pay movement, where pay-out is above the desired market reference point.
  • Manage red circled employees. i.e. employees who are earning above the maximum of their respective pay bands.
  •  Economic Climate: In an economic downturn, a pay freeze is considered an alternative to massive employee layoff, except in cases where the company really needs to shed weight. The results of the KPMG 2015/2016 HR Practices Survey of one hundred and twenty one (121) companies across various sectors in Nigeria shows that companies have responded to the current economic situation as follows:
How Organisations respond to Economic Conditions

How Organisations respond to Economic Conditions

  • Ability to Pay: A company’s ability to pay and sustain its desired pay levels is dependent on its financial size and the efficient utilisation of its resources.

Where the business performance is moving at a slower pace than pay reviews, a company can consider freezing pay, while leveraging on incentive schemes to drive individual and business performance.

Forms of Pay Freezes

Base Pay usually takes the first hit during a pay freeze.  Some of the possible options to pay freeze are highlighted below:

  • Freeze Basic Salary – This implies that only Basic Salary would be held constant. Fixed pay elements may be reviewed periodically to douse tension amongst employees.
  • Freeze Guaranteed Pay – Here, all items tied to Basic Salary would be held constant. However, this should not be prolonged, to manage retention.

In addition to freezing base pay, organisations may consider the following:

  • Review of Incentive Schemes: Whilst freezing guaranteed pay, an organisation may need to review its performance management system and incentive schemes to ensure linkage between individual and company performance.  A common practice is to modify Key Performances Indices and ensure pay-out is reflective of performance.
  • Treatment of Benefits-In-Kind: The depreciation in value of the Naira coupled with the reviewed automotive policy have increased the cost of certain benefits.  To cushion the effect of the escalating cost, some companies have undertaken to:
  • Monetise Certain Benefits – More companies have joined the band wagon. Companies must however consider the resulting tax implications, in the case of assets such as status cars, furniture and generators, e.t.c.
  • Set a Cost limit – Companies may choose to cap the benefits at a fixed amount, rather than incurring additional costs for the purchase of the same benefits.
The above, written by Damilola Akinduro and Busola Farinmade (Senior Advisers in Compensation & Benefits Unit of the Tax Regulatory & People Services Division, KPMG in Nigeria) is an excerpt from their article “Improving Employee Value Proposition during a Pay Freeze.”
David Okwara

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