Incentives for Growing Companies No.10: Managing Compensation in Times of Change

If life was ‘business as usual’ shareholders would make an investment decision. Their expected returns from that investment would represent the cost of capital for a business and the incentives designed for management would have a simple goal: deliver returns above that cost of capital, invest for growth and incentives will drive value. The greater the growth, the more value.

We can reward that.

But life isn’t ‘business as usual’.

In addition to rising inflation (lower purchasing power) and governments around the world running out of ‘red tape’ to legislate against every risk under every eventuality, we have:

• Material shortages caused by a shooting war in Ukraine, a country that is known for its substantial grain production (wheat, corn, and barley), consistently ranking amongst the world's leading wheat exporters
• A dawning realisation that the climate change doomsday forecasts may, in fact, be optimistic
• A demographic shift in China that has crept up on most of us. In 1990 there were an average of ten workers to every pensioner in China. It is now forecast that by 2050 there will be fewer than 2.1 workers for every pensioner. Estimates are that China will have
  to increase spending on elderly care by roughly 3x ($3Tn, up from $1Tn this year- over 15% of GDP at current projections)
• The unplanned impact of a global pandemic which altered - forever - attitudes to work

Those managing small to medium sized growing businesses can have little impact upon the first three, but how they treat staff at a time when attitudes to work are changing so markedly is an area which can be controlled. How should growing companies respond?

1. Work Life Balance: There is a clear trend with employees ‘burned-out’, particularly younger generations which are not as willing (as earlier generations) to go through pain with a view to happier times in the future. It is clear that remote working, which is popular amongst the younger generations who adapted well to this, must be a solid offering
     
2. Sustainability: Employees want to see, clearly, how company pay - at all levels - incorporates environmental, social and governance (‘ESG’) goals they recognise, and that executives’ performance evaluation ties their compensation to good outcomes.
    
3. AI and Automation: Artificial Intelligence is now here. Simply ask ChatGTP (for example) a question and prepare to be astonished by its speed and coverage. It isn’t perfect, by any means, but employees will have to be trained to make use of AI, to garner improvements in efficiency and productivity. This could include incentives, or merely training as a benefit.
    
4. Diversity: We live in a global world. Your company needs to reflect that in practice, everywhere. The simplest way to approach this is seeing the business benefits of considering a wider perspective of markets, products and services.
    
5. Political Changes (and Taxation): If polling is accurate (a big IF) we will have a new party in Government in the UK. Companies should look carefully at their response to taxation policies and ensure compensation packages reflect any change(s) and adapt to them.