What Will Happen to Compensation in a Recession?

From companies reducing total pay to looking into different ways to help the team, here are nine answers to the question, “What will happen to compensation in a recession?”

 

• A Temporary Lowering of Take-Home Pay
• Decreasing in Premiums
• Limiting or Eliminating Increments
• Shifting Focus to Non-financial Compensation
• Balancing Financial Stability With Retaining Talent
• Cutting Salaries from the Highest-paid Employees
• Using Compensation Cuts as a Last Resort
• Adopting a Structure Based on Performance
• Exploring Creative Ways to Compensate Your Team

 

A Temporary Lowering of Take-Home Pay

Compensation will decrease during a recession. Companies will be more cautious in their spending, and will try to cut costs wherever possible. One way they will do this is by lowering salaries and benefits. 

Employees should expect to see their take-home pay decrease during a recession. However, it’s important to remember that this is a temporary situation. Once the economy recovers, compensation will once again increase.

Matthew Ramirez, CEO, Paraphrase Tool

 

Decreasing in Premiums

At least in marketing, during a recession, there may be a decrease in employment and payroll, which can lead to a reduction in premiums for workers’ compensation.

It’s important to make decisions that will have a long-term impact on the cost of compensation and to ensure that employees can still rely on some level of compensation. It’s also important to note that entering the labor market during a recession can adversely affect a worker’s future earnings and employment prospects. 

Overall, the effects of a recession on compensation can vary depending on the circumstances and industry involved.

Brenton Thomas, CEO, Twibi 

 

Limiting or Eliminating Increments

During the last recession in 2009, I was employed with a large corporation and saw firsthand how it affected the compensation structure. While previously my team had quite generous salary increases, during the recession, these were limited or even canceled altogether. 

No one was thrilled with such a dramatic shift in policy, but everyone understood it was just part of the economic activity around us. We certainly didn’t leave our jobs because of the minimal increments, but morale certainly took a hit—though we managed to get through it together.

Lorien Strydom, Executive Country Manager, Financer.com

 

Shifting Focus to Non-financial Compensation

During a recession, companies may face financial challenges and may need to adjust their compensation strategies. Some companies may freeze salaries or reduce bonuses to cut costs, while others may reduce their workforce or decrease their hiring plans. 

Additionally, some companies may shift their focus to non-financial compensation, such as flexible work arrangements, additional training opportunities, or increased time off. However, it’s important to note that the impact of a recession on compensation can vary depending on the industry, company size, and geographic location. In some cases, highly skilled workers may still be in demand, and compensation may remain competitive in those areas.

Luciano Colos, Founder and CEO, PitchGrade

 

Balancing Financial Stability With Retaining Talent

In a recession, companies may experience a decline in revenue and profitability, which can lead to a decrease in compensation. However, the extent of the impact may vary depending on several factors, such as the industry, job type, and company size.

During a recession, companies may resort to cost-cutting measures to maintain their financial stability. This can include reducing salaries, bonuses, and benefits or implementing pay freezes and furloughs. Additionally, companies may also cut jobs or reduce work hours to lower labor costs.

However, it’s important to note that not all companies will react the same way. Some may choose to maintain compensation levels to retain their employees and remain competitive in the labor market. Others may increase compensation to attract and retain key talent, especially in industries with high demand.

Derek Sall, Founder and Financial Expert, Life and My Finances

 

Cutting Salaries from the Highest-paid Employees

Companies might cut salaries to conserve funds. During a recession, companies may have to reduce their budgets and expenses in order to stay afloat. This could involve cutting pay for employees or reducing hours of work. It is important to note that employers may choose to reduce salaries or wages across the board, sometimes reducing them for their highest-paid employees.

Martin Seeley, CEO, Mattress Next Day

 

Using Compensation Cuts as a Last Resort

Compensation cuts are like a double-edged sword during a recession, as they not only hurt the employees but can also negatively impact the organization’s reputation. I have seen firsthand how compensation cuts can cause significant distress within the team and even lead to a talent drain. 

Therefore, most organizations have viewed compensation cuts as a last resort and look for alternative approaches that maintain financial stability without compromising their workforce. 

One of the popular strategies among companies during a recession is to adopt a performance-based pay structure, which rewards high-performing employees while keeping costs in check by reducing paid overtime work. This approach not only incentivizes employees to work harder but also allows the company to control costs without resorting to across-the-board compensation cuts.

Sylwia Smietanko, HR Specialist and Recruiter, US Passport Photo

 

Adopting a Structure Based on Performance

Since a recession constrains a firm’s resources, it might force a reduction in employee compensation, which poses a serious threat. Yet reducing these expenses is not the answer; rather, compensation management needs to take a strategic approach. 

Using a performance-based pay system during a recession is the wisest course of action. Rewards that are performance-based are beneficial to both the organization and the personnel. When a performance-based compensation system is used, the company can drastically reduce its monitoring costs. 

Because their income is closely correlated with their accomplishments, the employees continue to be internally motivated to fulfill company goals. It would be preferable to create a pay package that includes both fixed and variable components, rather than just delivering a fixed wage. Reducing the amount of fixed compensation in the overall salary structure would achieve the firm’s goal of lowering financial liabilities.

Himanshu Sharma, CEO and Founder, Academy of Digital Marketing

 

Exploring Creative Ways to Compensate Your Team

The challenge with a recession-threatened economy is that most companies will be at a loss as to how to survive the difficult economic times and still offer competitive compensation to their valued employees. 

A change we can expect to see is more creative options being explored by companies, including providing compensation policies that promote career growth and advancement. As companies adjust to an uncertain economy, they will want to ease the fears of their employees by offering career advancement opportunities in place of monetary compensation, which is inflexible at such a moment.

Liam Liu, Co-founder and CMO, Parcel Panel