As of this writing, one-third (21 out of 63) of companies in the FTR 2021 Asia Compensation Planning Survey have reported a salary freeze in 2020. A large number of employers plan a salary freeze for 2021 as well. HR and C&B leaders need to know how to manage a salary freeze, including the “thaw” or coming out of a salary freeze. (Please join the survey to get the free reports with updates for 90 days.)
Executing a salary freeze is easy. You announce to everyone that no salary adjustments are allowed. No further action is required by payroll or HR apart from communication.
The hard part is coming out of a freeze. Affected employees–usually management or perhaps the broader workforce–will be wondering when the freeze will end and how it will end. They will wonder whether they will get what they’ve “earned but haven’t received”, whether adjustments will be retroactive, whether they will keep up with inflation, market salary movement, etc.
Hopefully, you considered these questions and addressed them honestly and transparently at the time the freeze was announced. But if you haven’t figured out yet how to come out of your salary freeze, you are in a tight spot. Here are some tips:
- Define the conditions for ending the freeze, and prioritize it
- Define your pay philosophy, especially pay mix and paternalism v shared responsibility
- Train all people managers to communicate about pay
- Be transparent where possible
- Be confidential where appropriate
- Consider a phased or selective approach
- Consider a DC philosophy, i.e. make no future promises
- Consider alternatives to fixed cash such as equity or incentives
- Eliminate entitlements and demand value for money
- Create a sound salary range structure and use it
There are important points behind each of these ten tips:
Item 1–criteria for thawing the freeze–should be defined as much as possible. It is not very reassuring to hear “we will freeze salaries indefinitely, until such time as we feel conditions warrant.” Vague criteria gives management full freedom and discretion, but can come across as cheap and secretive. If the message can be just a bit more specific, it could make a big difference: “We believe in keeping compensation market competitive. Many employers are freezing pay, and so are we. But as industry conditions improve and we feel our business is strong enough in terms of revenue, cost and cash flow, we will conduct a salary review.” This statement keeps management in control, but it gives employees a bit of assurance that management is eager to get back to normal in terms of pay reviews. Notice no promise is made to give raises, but only a “review.”
Item 3–manager training–includes training managers NOT to make any assurances to employees, such as “don’t worry, once things are better, I’m sure the company will make you whole again” or “I’ll find a way to make it up for you.” Teach your managers what they can say and what they cannot say. Advise your employees to ignore any verbal assurances they may receive from their bosses. Put key communications in writing, with appropriate disclaimers. Get input from Legal. Manager training is successful when managers stop sending people to HR for answers to “HR questions” and start to answer questions themselves.
Item 6 suggests a phased or selective approach, in which you communicate that the ending of the salary freeze does not mean everyone should suddenly expect a raise. Phasing means you make some high-priority adjustments (top performers, key positions, etc.) on a certain date, followed by a secondary review several months later. By doing this, you can ease your fixed costs upward more carefully, and you also bust entitlement thinking. Remind people that margins and cash flow are still suffering, if that is the case.
Item 7 refers to a DC philosophy, which stands for “defined contribution.” This is primarily a type of retirement plan, where an employer defines the monthly contribution they will make to an employee’s retirement account (whether statutory or company sponsored), without bearing responsibility for the ultimate retirement benefit to be received by the employee. Likewise, DC could refer to a health care benefit where the employer budgets $5,000 per employee, then leaving it up to the employee to buy their own insurance, etc. A DC philosophy could be applied to global mobility as well, by giving an assignee a local or local plus package worth $15k per month, with no regard to the employee’s rental or school costs, etc. A DC reward philosophy essentially means the employer can only promise how much they will spend for you, not what you will get.
A DC reward philosophy essentially means the employer can only promise how much they will spend for you, not what you will get.
Item 9 – breaking entitlement mentality among workers–is very important. Employees should not be thinking (or saying) “they’re not giving us our raises!”, or “they’re taking my money” which reflect an entitlement mentality. Use challenging times to educate and sensitize employees to the economic realities of running a business. If customer orders are down, and customers are negotiating discounts, can you raise fixed costs (salaries) and expect the business to maintain its profit margins?
If you reduced salaries for management or others in conjunction with a freeze, it gets even more difficult to come out of your freeze. Expectations of restoration or “restoration plus” will need to be addressed as honestly and transparently and fairly as possible.