Discover the future of comp & ben: With Monika Andrić Vučićević

Well, it's there: revolution in performance management is ongoing since 2000s.

We have witnessed dropping down traditional performance reviews, annual rhythm of the process, administrative burden of the process and lack of transparency altogether. The critique was that the traditional process was all about financial incentives at the year, focusing thus on accountability for past behavior, rather than future improvements. There was also a clash with team ways of working.

Instead, alternative ways of thinking about performance management have prevailed in terms of more regular performance conversations, development focus, feedback & coaching. The process has become more informal and agile. At the same time when the revolution started, Agile Manifesto was promoting collaboration, self-organizing teams, reflection, quicker responses to change. Instead of a top down approach in setting waterfall goals, definition of performance has evolved to include not only the way individuals and teams create value for stakeholders, but also capability development and wellbeing.

Two decades later some challenges still persist: How do we reward top performance, how do we overcome bias, how do we separate financial decisions from development, how do we increase transparency, and align comp & ben with culture. In this interview we are tackling some of these challenges with Monika Andrić Vučićević, one of the leading experts in the field of comp & ben.

Jelena: Monika, we are witnessing huge changes in the field of work, like freelance economy, part time work, moonwalking, rise of the work from home, increased employee expectations around employer flexibility, automatization and AI. Despite the layoffs in 2023, employee turnover and retention are still key organizational concerns. And compensations are seen as the most important factor impacting voluntary turnover. How do these changes in the way we work influence comp & ben strategies in your opionion?

Monika: The last few years have been challenging. The state of the economy is uncertain, but the storm brought by the pandemic is subsiding, and the labor market is calming down. However, despite recent layoffs, unemployment is at a 50-year low, workforce participation continues to decline, and there is a lack of skills that organizations need to grow. Workers have also reprioritized their values, needs, and expectations when it comes to work experiences.

2024 looks to be a key year for compensation strategy. Many organizations got into trouble by not revising their total rewards program during the pandemic. Some organizations over-hired, overpaid for talent, and contributed to a culture where “quiet quitting” was the only option for employees who felt unrecognized, insufficiently rewarded, and burned out.

Organizations are under pressure to remain competitive, and one of the critical factors in achieving success is to attract, retain, and motivate top talent. Although many companies are aware of this pressure, they often struggle to understand how to design effective strategies and launch initiatives that can engage and motivate their workforce. Providing adequate benefits and pay through traditional processes is no longer sufficient. It is also essential to segment the workforce, differentiate rewards, and demonstrate how employee contributions can impact business outcomes as well as individual rewards. Managing and adjusting salary ranges frequently is also crucial to maintaining a competitive edge in business.

We see that the one-size-fits-all approach is no longer working. Leaders need to be more creative in order to obtain new, competitive talent and retain old, reliable talent. It is important to note that talent is found in various places. Especially due to labor shortages, companies have been sourcing from part-time pools, contingent work pools, and future talent not yet in the job market.

Jelena: What are some of the global trends in compensation strategies? For example, there is data out there that US organizations plan to increase salary budgets for 4%, which is somewhat less than 2023 and 2022, but more than 3% in 2021 and pre-pandemic years in the last 10 years. What is real growth there, taking inflation into account?

Monika: In recent years, we have observed significant fluctuations in the economy. This has made it difficult to predict costs for the upcoming year accurately. For instance, many businesses had predicted lower costs for 2022, but changes in the labor market led to an increase in costs. As a result, I am feeling pessimistic about the current situation, which is impacting employee productivity. Remote work is one potential solution, but businesses are also transforming, creating digital strategies, and requiring more skills. There is so much going on at the moment as we are in a transition period, and it may take some time for employee productivity to recover.

To face the challenges in 2024, more organizations are investing in compensation strategies. Considering the volatility of 2022, many employers are anxious (are worried) about pay increases. On the one hand, employees are demanding higher wages due to inflation. On the other hand, the economic outlook for 2024 is uncertain, which leads to organizations being more conservative when it comes to pay.

According to the survey, 73 percent of organizations in Europe plan to give base pay increases in 2024. In addition, only 38 percent of organizations in Europe plan to give pay increases of over 3 percent, which is considerably less than those in the overall report who say the same.

Despite increased competition for labor, 31 percent of organizations in Europe expected their salary budgets to be lower than originally planned. As for the reason behind lower salary budgets, economic conditions are cited at the top concern in Europe.

I’m pessimistic about 2024, I do not have a good feeling, especially from a political and economic perspective. So it wouldn’t surprise if we see potential pay increases not as high as that 4% figure that we’re saying in some sectors. However, this is just my speculation.

When it comes to Serbia, there has been a 15% nominal increase in salary between January and September this year in comparison to the same period last year. However, when we take living costs and inflation into consideration, the increase is actually closer to only 1%. The salary increase in September this year was nominally 13.5% and realistically 3% in comparison to September 2022.

Jelena: Many leaders are asking some typical questions around compensation strategy: how do we create it, how do we take inflation into account, how do we know if we are in line with the industry standard, or even how do we align comp & ben with our organizational culture. What is your advice? How would you advise leaders regarding these dilemmas?

Monika: First of all, you need to understand your own labour market and the business challenges. You must focus on your own business and analyze and monitor what is happening in the market.

I think that the role of benchmarking in developing a rewards strategy is changing slowly as well. While nearly all leaders still recognize the importance of understanding program alignment to market, many are using other data points to drive decisions around total rewards. It is no longer enough to ask, “Are we aligned to market?” As part of the new mindset, leaders now ask more strategic questions like, “Are we aligned to market on the things that matter most to our employees?” or “Do our broader strategy and guiding principles take precedence over what the market tells us?” Because it’s more important to do what’s right for us rather than what everyone else is doing.

My advice is to give managers the freedom to make compensation decisions allocate individual budgets that fit the company budget and strategic goals and give clear guidelines around the allocation of funds.

Next is to share data analysis with managers.

Understand who your key employees are for budget allocation. Understand what are you paying for, and understand the process.

Which elements of compensation do employees value, and what is important to them?

Determine which benefit gives you the best ROI. Do an analysis, ask employees which benefits they value the best, put it to the cost of the benefit, and then you can see what gives the best return on investment.

How to recognize high/low performers? One way is to define metrics or KPIs to measure the results. However, many metrics are not well-designed, and organizations measure everything easily to count instead of what really matters. Therefore, it is important to record performance questions and determine the questions you want to answer before developing indicators. This will help you track your objectives.

Part of a good performance management system is to have regular performance discussions. However, this process is usually on an annual basis, with review meetings where individuals sit with their managers to go through a script. Instead, meetings should be held more frequently, weekly or monthly, where discussions are held on individual objectives, refining them and setting ambitious goals for the future. These discussions should focus on how the company and manager can support individuals in achieving their goals. This is what I would like to achieve. This is what the company would like to achieve. How do we know to align them? How can the manager and the team support you and achieve some of these goals so these really meaningful regular discussions about performance?

Jelena: What are priorities from your viewpoint when it comes to defining compensation strategy?

Monika: As a business, it's important to have a clear idea of where you want to go and what goals you need to achieve to be successful. It's helpful to write these goals down on paper so that everyone in the organization can understand them and work towards them. Once you know what your goals are, the next step is to break them down into smaller objectives. This process should start at the top of the organization and be communicated to everyone. Sometimes it's better to have a natural process where everyone in the organization defines their objectives, making sure they fit with the overall goals. To measure success, it's important to define metrics or Key Performance Indicators (KPIs). These metrics help you understand if you're making progress towards your objectives and what success looks like. It's important to choose the right metrics and make sure they're meaningful. Finally, it's important to have a good reward and recognition system in place. This doesn't just mean giving people bonuses for meeting targets. It means showing appreciation for good work and celebrating success. It's important to recognize that financial rewards should be based on job performance, not just meeting specific targets.

I think that key challenges for compensation would be

Ensuring pay equity and fairness.

Balancing cost and competitiveness
Investment - ROI on compensation spent
Delivering on pay transparency.

Jelena: We have data that one of these trends is exactly pay transparency. There is even EU regulation now that prescribes listing salary data according to pay ranges. How do you see this trend and what are your recommendations regarding transparency?

Monika: Pay transparency is now imperative in Europe. In March this year, the majority of the European Union (EU) Parliament adopted the Directive on pay transparency.

The directive has two key elements: pay transparency measures and better access to justice for victims of pay discrimination.

Some of the requirements apply to all organizations while others are required based on employee count. The directive requires employers to provide pay ranges to job candidates as well as specific pay information to employees at their request, including average pay levels broken down by gender. In addition, employers will have to publish their gender pay gaps. We see a similar request in Serbia, where private and public sector organizations with more than 50 employees have an obligation to provide a report on gender equity.

This legislation is an opportunity to close the gender pay gap. It will be celebrated by employees, especially younger generations who have been insisting on pay transparency. The majority of organizations in Europe (56 percent) say that recent pay transparency legislation has driven them to change or improve their compensation practices, as they are trying to improve their pay data, pay structures, and pay equity. Many organizations don’t add pay ranges to job ads because they suspect it will lead to discontent in their current workforce due to a lack of confidence in their salary data and pay structures. It is important to first be certain that employees are being paid fairly to market and that there are no significant pay gaps in the organization between employees with the same jobs or doing similar work, especially when analyzing pay between protected classes, such as men to women.

Organizations are looking for help on the journey toward fair and transparent pay. Pay equity and pay transparency are complex solutions that require strategic planning, dedicated resources, and a more mature approach to compensation. Not only do employers need to continue to make competitive salary offers to attract talent, but they must also be aware of making offers that do not lead to pay inequities for current employees. This requires quick access to salary data and ongoing pay analysis.

Salary transparency is seen as a positive thing in theory. It can promote fairness, reinforce internal trust, and provide more clarity on compensation throughout an organization. However, in practice, it can lead to negative consequences such as envy and can limit managers' flexibility during negotiations. Flexibility in negotiation is important precisely because the market lacks skilled people.

Transparency is complex and it poses various risks and challenges. On the one hand, leaders understand how important transparency is, but on the other hand, they are divided on how to achieve it. Some choose to focus less on transparency metrics and more on making sure they are doing the “right” things to promote career growth and equity. They use transparency as a great opportunity to build trust with their employees and remove some internal frictional operational costs. Other leaders are choosing to focus on bringing employees “behind the curtain” to understand why decisions are made, why discrepancies may still exist, and how the company resolves those discrepancies.

However, the fact remains that while transparency is important, all transparency strategies need more work in order to ensure they are meaningful, personalized, and well-received by employees. It is critical to have a proper structure and an effective communication strategy to support it (such as job architecture, job leveling, and rewards framework).

Jelena: Some of the approaches to compensation strategy boild down to agilization: ask the employees as "customers", define the strategy in line with data, pilot new strategy, fail fast-learn fast, and constantly improve the strategy. What do you think about this approach, how dominant is it in our markets? And how desirable in your opinion?

Monika: To complement the new ways of thinking about their structure and team, some total rewards leaders are also shifting their mindset around how they diagnose and solve problems, focusing less on a traditional technical total rewards functional approach and instead embracing new principles of design thinking. With a design thinking mindset, total rewards leaders must first develop a deep understanding of their users (both employees and the business). For example, can they deconstruct their broader business growth objectives and identify problematic areas? Do they understand the difference between what employees want and what they actually need? After answering these and many other questions, they need to again ask themselves what is the difference between perceived problems and real problems. All of these answers will help create innovative solutions. The result of this design thinking approach is that problems are not solved in a vacuum but rather create a path for faster, more impactful resolution.

I am finding it more and more important to adopt a new mindset focused on active listening. To stay on top of changing expectations and fluctuations, leaders are starting to survey more and pay closer attention to employee feedback. The focus is shifting from quantitative surveys to open survey comments that allow for clearer ideas on what the employees need and want.

To this end, leaders are also doing more research into better strategic use of technology – data analytics and smart solutions that can help understand employee needs.

Jelena: One tough question. How do we overcome bias when making decisions around salary increase/decrease? Some companies overcome this by creating dual roles: team leads that are devoted to development and leads that make pay decisions. What do you think about this approach?

Monika: Based on my personal experience, it is challenging to achieve, but I believe that a manager who works alongside employees knows their work best. One effective approach is job and team rotation. This has been successful for me in practice, allowing for two managers to evaluate the employee's work performance. However, it is crucial to have a clear strategy in place for defining performance management, indicators, reward systems, salary, and bonus ranges. These must be clearly established.

Jelena: Let's touch upon employee benefits in more detail. First, there is data that employees consider as a key benefit just a "normal" work environment. That is an unusual definition of a benefit. Second, they expect high levels of employer flexibility when it comes to benefit policies. Third, ever since the pandemics, work from home has become perceived as an expected benefit. Finally, people want to do interesting work. They have expectations to be allowed to work for more than one employer. What's your view of this data in light of comp & ben strategies?

Monika: Employee needs and wants are directly tied to total rewards. Benefits are an essential way to attract and retain diverse talent. Global leave programs, stock ownership programs, and well-being programs have already proven efficient in reinforcing market positioning.

However, it’s not just about pay and benefits. Multiple surveys cite that career opportunities and growth have a meaningful impact on employee engagement and retention. Numerous leaders recognize that investing in careers, as well as learning and development programs improves total rewards without adding immediate costs. Development programs also help employers diversify skills, which is particularly useful when working with tight hiring budgets. This is a smart approach to deal with economic uncertainties, especially since total rewards are often added over time according to current trends. This can often result in programs that initially cost small amounts of money, but that add up over time to a big expenditure. So, to optimize return on investment, many leaders are exploring pathways for employees to access benefits and communicate the value of the programs.

Rewards leaders also take a new mindset regarding their own talent needs within their function. More and more total rewards leaders cite the need to have diverse skills, backgrounds, and experiences represented within their pay and benefits teams. While deep subject matter expertise of pay or benefit programs is important, some leaders acknowledge their team could benefit from rotation programs, creative analytical thinking, digital and technology skills, relationship skills, and team members who best understand the "customer" (their employees) and can navigate stakeholder issues more effectively.

Jelena: As part of the total rewards system, it's frequently talked about employee wellbeing. In our local markets this may mean actually - availability of a psychiatric service. Then we have the stigmatization and underuse of this benefit. What do you think is the best way to address mental wellbeing in organizations?

Monika: The past three years have shown us that there are problems with current models – which put too much focus on individual production, which often has negative consequences on employee health and well-being later on down the line. It also negatively affects diversity, equity, and inclusion. As a result, we (leaders) are thinking more and more about employee well-being, it is crucial for employees to feel supported in order to drive the organization’s culture. I think that we need to make more tactical investments in well-being programs because I believe they directly affect the financial performance of the business.

Wellbeing as a driver. We observe how total rewards leaders are beginning to think about employee well-being and focus on the connection between employee and workplace well-being and productivity.

We should focus less on ratings and more on how the employee achieved results: did the employee demonstrate a growth mindset and company values? Technology is once again an important factor here – more and more companies are opening up to artificial intelligence and predictive analysis to assess performance. However, the true effectiveness of that is still debatable.

Jelena: I need to ask you this for the end: geopolitical uncertainties and AI. Where does this lead us with comp & ben strategies?

Monika: Last year was difficult for many people due to various reasons. There were several challenges faced by HR leaders and compensation professionals. Some of these challenges included the invasion of Ukraine, high inflation, financial instability, union strikes, etc. These issues led to labor shortages, which affected both Europe and other parts of the world. Additionally, the unemployment rate in the Euro area was exceptionally low at 6.6% in December 2022, which means that companies will have to offer competitive salaries to attract the best talent. As we move forward into the next year many organizations are feeling uncertain due to the global economic situation, which has shown signs of recession.

When it comes to compensation management, organizations must balance demands for higher pay against the possibility that revenues could decrease and layoffs could become necessary later in the year. The potential for layoffs is more likely in organizations that overextended themselves to hire fast – and at any cost – during the Great Resignation. Combined, these factors are driving more organizations to increase investment in compensation.

The Great Resignation - In 2021, according to the U.S. Bureau of Labor Statistics, over 47 million Americans voluntarily left their jobs — an unprecedented mass exit from the workforce, urged on by Covid-19, that is now widely being called the Great Resignation.

Companies offering competitive compensation and benefits but effectively managing these benefits while still keeping employees happy may be difficult. Here is where AI comes into play.

AI-powered chatbot allows employees to ask detailed inquiries about their salary and benefits at any time. These chatbots answer questions quickly and clearly, relieving pressure on HR departments.

It can be challenging for HR departments to keep up with constantly changing compensation and benefits regulations. By consulting with hrGPT, HR professionals can stay informed on the latest regulations.

AI-powered solutions can help businesses save time and money by automating manual processes such as answering employee queries and explaining their benefits packages. As a result, human resource departments can save a lot of money. For example, after using hrGPT, a language model designed for HR tasks, professionals experienced a 40% reduction in the time it took to respond to common questions related to pay and benefits.

Companies that adopted AI to manage their employee benefits and compensation have a lot of benefits: 1. It has resulted in a 20% increase in job satisfaction since employees have quick access to data on their compensation and benefits, making them feel more secure about their financial future; 2. The companies are now in compliance with the majority of the latest compensation and benefits laws, thanks to the HR department staying up-to-date on the latest regulatory developments and being able to quickly adapt to changes; 3. The HR department has reduced their workload by 50%, saving them time that was previously spent answering standard questions regarding salaries and benefits. This has allowed them to focus on more high-level projects; 4. By automating operations with AI, the administration expenses for employee pay and benefits have been reduced by 30%, resulting in cost savings for the company.

Jelena: Monika, many thanks for this conversation and an opportunity to get a glimpse into the future of comp & ben!