Using financial forecasts to set compensationWith so much upheaval, finance will have to pay close attention to data when adjusting compensation structures in the year ahead.
COVID-19 has entirely changed the way many companies operate, from go-to-market strategies and where employees work to the fulfilment of products and services.
Financial leaders will have to rely on new data and information, as opposed to historical figures they used in prior years, to create forecasts and compensation models and incentives for the year ahead.
Companies shifting their focus from growth to preservation due to COVID-19 are now forecasting negative growth and identifying cost-cutting measures to mitigate the loss of revenue and ease the impact on the bottom line.
Identifying what costs to cut is one step of many. It can take time before organisations see the reductions in the cost-cutting measures; therefore, access to cash is crucial.
For most companies, people are the biggest expense. Depending on revised income and cash flow forecasts, companies will need to determine what direction they are going and what compensation changes need to be made.
In building compensation models, organisations typically base compensation and bonus structures around goals and metrics tied to activity that would yield revenue growth and align with overall company goals. With COVID-19, old goals may be out of reach, and the metrics used to derive them may be obsolete.
Companies must take a hard look at their current plans and goals and decide whether to make changes to compensation plans. Certain performance metrics may no longer be aligned with the current state of business and a company’s goals.
Companies now need to focus on the most current and real-time data they can access around sales, operations, and performance, and then align those with the new company goals. For example, revenue growth may have been a key metric in performance planning, but if revenue is expected to decrease or remain flat, the metric may need to be adjusted or completely changed.
In the new world of working from home, with virtual selling and limited client entertainment opportunities, how the product or service is sold has changed; therefore, metrics to track for building compensation and bonus structures must change as well.
Financial leaders should meet with sales leadership and front-line managers regularly to understand this new normal and discuss what has changed for the business, specifically business generation. What behaviours do they believe will lead to new business and increased revenue? Of those, see what can be tracked, analysed, and measured to possibly tie to variable compensation.
Emphasis on metrics around client retention
Ensure you are incentivising the behaviour tied to protecting the business you do have. If your business has multiple segments and you are a proven vendor for the client, one opportunity to track metrics and link to compensation is cross-selling your services and/or products to other leaders within that client.
If your company already has buy-in from one decision-maker in that business, leverage the relationship to get introductions to other department leaders at that company, and build metrics around that to track.
Also consider tracking metrics around staying in touch with the companies that are unable to use your service or purchase your product right now. Encourage employees to stay in touch with the clients that are on pause right now but who are likely to rebound as the economy recovers.
When looking at the business, identify what drives revenue and zero in on that when building out incentive programmes. For instance, many companies restructured commissions to pay out at a higher rate for new business to incentivise business growth.
As the saying goes, don’t let a crisis go to waste. COVID-19 has given organisations the opportunity to re-evaluate what drives revenue for their organisation. It has given leaders new perspective on what metrics and activity yield results and matter most.
Re-analyse how your organisation once did business compared to today and see the opportunity gaps as you plan out the quarters and years ahead. Consider the new metrics to base variable pay on that will incentivise employees.
There is no one-size-fits-all approach to restructuring compensation and conducting financial forecasts for the year(s) ahead. Every organisation will need to take a unique look at its situation as each, regardless of industry or size, operates in a unique fashion.
However, the constant across all organisations being successful is communication. Have transparent conversations with employees as soon as possible, because when it comes to compensation, changes shouldn’t be a surprise to employees. The organisations that prioritise transparent communication are those that can most effectively retain key players during down times.
As you approach any financial restructuring in the months and years ahead, build in caveats that things can, and most likely will, change.
The biggest mistake company leaders make is assuming everyone is driven solely by monetary incentives and that everyone is motivated by the same thing. Yes, many people will never reject a monetary increase; however, companies need to focus on other ways to drive engagement as pay increases and bonuses are put on hold. These include:
- Increased paid time off: Many employees are hoarding time off for when the world goes back to “normal” and they’re able to use the time off to travel rather than staying at home and doing nothing. However, taking a mental health day occasionally is crucial, especially in times like these. An offer of more paid time off will incentivise employees to take the necessary mental health days, which in turn will lead them to be more productive.
- Employee recognition: Countless reports rank public praise as a top motivator for employees, and in times of high stress, when employees are going at top speed to deliver for their companies, recognition of their work can be motivating for employees.
- Nonfinancial promotions: Many employees have proved their worth to the organisation in these trying times, stepping up in impressive ways, and that shouldn’t go unnoticed. Whether employees were on promotion tracks or not, consider title promotions to motivate them to keep climbing. For those motivated by more than compensation, a title change can be a useful incentive.
- Flexibility: When employees begin returning to the office, consider offering more flexibility to work from home. After months of working from home and having grown accustomed to it, employees may find it hard to transition back to five days a week in the office. Providing leniency around this and letting employees work from home one or two days a week will help.
— Lawrence Casas, CPA, is the CFO of LaSalle Network, a national staffing, recruiting, and culture firm based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.