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Rethinking performance management in a cost of living crisis

Discover how employers can adapt to the challenges of the cost-of-living crisis, pay inequalities, and skills shortages by prioritizing employee wellbeing and investing in talent development.

27 Mar 2024

Catherine Ngo

Content writer, presenter and podcaster

As employers, how are we responding to the cost-of-living crisis, pay inequalities, low economic growth and severe skills shortages with new solutions for talent, reward and performance management? Having argued inflation has nothing to do with us, we may be preoccupied with maximising profits and returns to our shareholders and minimising wage costs. Unfortunately, this view is short-sighted.

The pandemic highlighted the importance of prioritising employee wellbeing and security for employers. When employees are preoccupied with fulfilling basic needs due to sustained cuts to their real incomes, their ability to perform and excel in their roles diminishes. Addressing this issue requires more than standard pay and benefits reviews or benchmarking against competitors.

How do employers navigate a tight employment market with increasing compliance and complexities? They invest in people and achieve higher returns and value added by growing a highly skilled, better-rewarded, and more engaged workforce.

The employment market is staying very tight, forcing these investments. If you can't recruit people, no matter how much you pay, you have no alternative but to develop your people. These are the natural choices employers face: recruit or develop in-house, cut employee costs or invest for future higher value-added?

Are you going to take the high road to high performance or try the cost-focused shortcut that has given us stagnant productivity, growing in-work poverty, widening inequality, and some of the lowest levels of employee engagement throughout?

Performance Outcomes and Economic Prosperity

In today's challenging economic climate, characterised by low productivity, high inflation, and the threat of recession, there is an urgent need to understand how to achieve high performance.

A superficial approach that justifies lower pay under the guise of flexibility has been ineffective. It is essential to examine why companies are implementing specific strategies critically.

Managing recruitment budgets, forecasting, and workforce planning becomes paramount in a world where people and skills are critical sources of competitive advantage. New technologies can facilitate informed decision-making, enabling organisations to balance people and performance effectively.

Skills shortages are prevalent, and while the government plays a crucial role, employers recognise the need for increased investment in upskilling and reskilling their workforce for the future.

Fairness has been a central consideration in pay and rewards, but prevailing attitudes toward talent competition have influenced its implementation. Market-focused pay and incentivisation have contributed to significant pay gaps.

HR leaders now focus on internal talent pipelines due to the scarcity of qualified workers. Organisations have no choice but to grow and train their talent.

Performance management is shifting towards developing employees' strengths rather than punishing their shortcomings in pay. Performance appraisals are being conducted separately from pay reviews to foster a growth-oriented mindset.

Adopting a Holistic Approach to Performance Management for High Performance

Talent retention is crucial for high performance. It involves fostering an engaging and supportive workplace culture with effective management and continuous feedback to retain employees at all life stages. This approach aligns with the cost-conscious era, as it addresses the high turnover costs and skills shortages many sectors face.

Currently, there is a need for a more joined-up approach to performance management. This includes ensuring that pay, benefits and rewards are valuable, relevant, effectively communicated and well-aligned with employee and employer needs.

In the future, performance management will increasingly be tied to skills-based pay as organisations focus on developing their talent, especially with the introduction of artificial intelligence (AI). Pay equity and transparency are also becoming priorities for HR directors.

The current environment is particularly interesting for performance management and rewards related to high performance, mainly due to high voluntary attrition rates. To address this, creating conditions that encourage employees to stay, thrive and perform can be a cost-effective and sustainable long-term investment. This approach yields economic, social and personal benefits for all stakeholders.

Key Takeaways

The current economic climate, characterised by low productivity, high inflation, and the threat of recession, demands a holistic approach to performance management for high performance. Investing in employees' wellbeing, security, and skills development leads to a more engaged, productive, and higher-skilled workforce. Fairness and equity in pay and rewards, along with adopting a growth-oriented mindset in performance management, are essential for talent retention and long-term sustainability.

Additionally, creating a supportive workplace culture, effectively communicating benefits and rewards, and aligning them with employee needs are crucial for enhancing performance and economic prosperity.