This paper examines how organizations undergoing resizing can maintain employee engagement and organizational performance by understanding and adapting psychological contracts. It discusses the strategic importance of gathering employee feedback on valued benefits, monitoring changing employee needs, and aligning total reward packages—including pay, benefits, and development opportunities—with organizational direction. The paper emphasizes human resources' role in facilitating both displacement and retention services, and explores how employers can address psychological contract breaches through communication, procedural fairness, and employee choice. It concludes that a coherent compensation philosophy grounded in clear understanding of what employees produce is essential for effective talent management during organizational change.
Resizing organizations must have a clear sense of their desired direction and work to convince employees that this new path benefits all parties involved. First, organizations need to gather information about what psychological contract obligations employees perceive as most valuable. The best approach is typically an employee survey, through which organizations can identify what employees want if they hope to retain and motivate key personnel. Understanding employee values allows organizations to implement resizing efforts more prudently, as leaders become better equipped to minimize perceived psychological contract breaches.
Organizations must constantly monitor the changing needs of their employees, tying this process to strategic direction. Human resource managers need to recognize that as organizational strategy changes, the operational design of total reward packages and their implementation methods must also change to increase the likelihood of satisfying employee needs. By examining all total reward dimensions—such as pay, benefits, and employee development—organizations can satisfy a larger number of employees during resizing (Trahant, 2007).
When psychological contracts require modification, employers should adapt them in light of new employment circumstances. As employers design increasingly sophisticated wellness programs, the final HIPAA nondiscrimination regulations clarify important points that employers should discuss with legal counsel (Simon et al., 2007). Both procedural and interpersonal remedies can reduce adverse consequences arising from psychological contract changes (Morrison & Robinson, 1997; Rousseau, 1995). Remedies to reestablish relationships may include instituting communication mechanisms that explain how decisions are made and implementing actions allowing employees to confront or appeal job decisions. Human resource managers should ensure employees understand how the organization attempts to meet their multiple needs and should provide opportunities for employees to express changes in their expectations. By focusing on employee needs in conjunction with managerial capabilities and resources, managers can retain key talent.
Human resource managers serve as facilitators for many resizing benefits provided to displaced employees and those remaining with the organization. For displaced employees, the human resource staff should schedule outplacement services, coordinate employee severance packages, and provide counseling services to assist layoff victims. To address the needs of surviving employees, human resource staff should engage in activities such as providing counseling, communicating updates on new compensation packages, and offering additional job training.
Pay remains one of the most important areas of the modern firm. Traditional reward methods relied on money compensation, which can drive, motivate, and reward employees—or accomplish the opposite. Many past and current pay structures are frozen, based on tenure, entitlement, and internal equity. The concept of "new pay" articulates a more coherent direction for pay systems by linking compensation to employee and firm success, combining ideas of total compensation with employee choice (Chen & Hsieh, 2006).
The total compensation solution rests on four foundational ideas. First, previous and most current pay systems are serious impediments to attracting, retaining, and motivating contemporary employees. Second, total compensation involves more than pay and benefits. It encompasses ten variables: base pay, augmented pay (bonus, overtime, gain sharing), indirect pay (benefits), work-pay (tool allowances and similar items), perks-pay (amenities and discounts), opportunity for advancement and growth, psychic income, quality of life (work-life versus whole-life balance), and an X factor representing any particular employee interest.
Third, these ten elements must be aligned in a solution tailored for each employee within a single organizational unit—what might be called the Total Compensation Department. When elements remain unaligned, firms lose leverage even when various departments address many or all compensation variables. Fourth, the total compensation solution must involve some degree of choice for employees, suggesting that cafeteria-style compensation is increasingly essential.
Firms need a clear, coherent, and consistently articulated compensation philosophy. However, organizations typically face three problems: no philosophy, the wrong philosophy, or significant gaps between appropriate philosophy and its implementation. Most organizations lack an explicit pay philosophy, though some maintain primitive views. A sound philosophy involves five key components:
Despite the apparent obviousness of these components, firms commonly struggle with some or all of them, making it worthwhile to examine each in detail.
Few firms truly understand their own compensation equation or what might be called the compensation exchange. Few can even answer the fundamental question: "What are we paying for?" When this question is posed to managers across industries, answers reveal deep confusion. Some provide responses like "We pay employees to show up and shut up," while others deflect by saying compensation is simply a necessity of doing business. Yet the problem runs deeper: firms that cannot articulate why they pay probably cannot articulate the work products they expect employees to deliver.
Several years ago, John Naisbitt posed the foundational question: "What business are you in?" This deceptively powerful query forces employers to examine exactly what they are producing, offering, and selling. Only then can they begin answering what they are paying employees to produce. Therefore, the first step in defining employee rewards is to identify what products employees are supposed to create and what lines of business they serve. Although difficult, this first step is necessary and yields benefits extending well beyond compensation philosophy development.
This foundational understanding serves as the score for the organizational orchestra, allowing all parts of the organization to achieve alignment so each player contributes in synchronization with all others. In terms of the compensation system, this clarity allows desired employee accomplishments to be articulated explicitly, ensuring that compensation strategy reinforces organizational mission and employee contribution. When organizations ground their reward systems in this shared understanding of purpose, they create conditions for both employee satisfaction and organizational effectiveness during periods of change and resizing.
Atkinson, William. Filling in around the edges, HR Magazine, 2009.
Chen, H.M., & Hsieh, Y.H. (2006). Key trends of the total reward system in the 21st century. Compensation and Benefits Review, 38(6), 64.
Simon, M., Tamara, T., Kelly, T., McGeoch, B., & Bruno, F. (2007). How the final HIPAA nondiscrimination regulations affect wellness programs. Benefits Law Journal, 20(2), 40–44.
Trahant, B. (2007). Debunking five myths concerning employee engagement: A recent report debunks the myths and reveals practices for enhancing individual employee effectiveness to improve organizational performance. The Public Manager, 36(1), 53.
"Linking compensation clarity to organizational coordination and performance"
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