Center Webinar Explores Inflation’s Impact on Compensation Plans

The Center hosted a member-only webinar this week to discuss the impact of inflation on incentive plans and how employers will respond to employees’ pay expectations in the current environment. The call featured leading compensation consultant Blair Jones of Semler Brossy and Lynn Castrataro, Head of Total Rewards at Trane Technologies, and was moderated by Shelly Carlin, Center Executive Vice President.

The webinar focused on four “levers” to accommodate uncertainty in the business and effects from inflation while ensuring outcomes make sense and are appropriate.

Performance Metrics: Diversifying financial metrics in an annual incentive plan can be helpful because not all measures will be sensitive to rising costs like profit metrics. If plans are designed to consider multiple measurements such as a cash flow or performance against an index, some of the risk can be mitigated. Ms. Jones cautioned that if you use strategic or non-financial modifiers in your plan, make sure they are tied to a compelling measure strategically aligned to long-term goals.

Target Performance Levels:  Goal setting can be extremely challenging in an uncertain business environment but changing targets can also be tricky.   Management should examine payout curves closely and assess what they are willing to pay if goal thresholds are lowered. 

Performance Periods: Shortening the performance period can address concerns over what is an attainable vs. stretch goal. Two potential strategies: set overlapping award cycles for LTI plans to allow for revision of performance objectives each year based on more realistic conditions, or define more frequent time frames for evaluating performance with guardrails around target if performance fluctuates significantly in later years.  Ms. Castrataro discussed the importance of obtaining current financial and operations data and working closely with Finance with forecasting and accruals. 

Informed Judgement: All panelists agreed that Compensation Committees are willing to be flexible and apply informed judgement to adjust incentive plans when the formulas from financial metrics do not produce what seems to be a reasonable and appropriate incentive outcome based on performance. Frequent and open dialogue throughout the year is key. Developing a scorecard that establishes principles and criteria for using discretion is critical and will help clarify how and when discretion will be used. Scorecards provide the framework for committees to use discretion consistently from year to year and help support the messaging behind the adjustment.

The Center has published an analysis that dives into this topic in further detail. 

The panel also reviewed HR Policy’s recent survey on changes employers may make with their employment and compensation strategies in anticipation of a potential recession, continuing inflation, and labor shortage. They agreed that companies will need to be thoughtful on how to use their salary budgets and discussed the concept that some talent markets will stay strong in a downturn so differentiation of pay for critical functions and high performers is needed. Ms. Blair and Ms. Castrataro also reflected on how to be creative from a rewards perspective and consider non-compensatory benefits that resonate to help retain talent.