Keep Compensation Competitive in a Tough Ag Economy

The agricultural economy has entered a period most leaders have not experienced in many years. Margins are tighter. Growth is slowing. Input costs are rising. Credit quality concerns are increasing.

At the same time, employees feel the effects of inflation. Their compensation expectations often remain anchored in a stronger economy. That leaves executives and boards wrestling with a difficult question: 

How do we remain competitive without simply spending more money?

Over the past several years, many cooperatives treated compensation competitiveness primarily as a budgeting exercise. When talent became harder to find, salaries increased. When turnover rose, incentives increased. When inflation climbed, compensation budgets expanded.

That approach becomes difficult to sustain when revenue and earnings are under pressure. The cooperatives that navigate this environment successfully will not necessarily have the largest compensation budgets. They will be the ones making the most intentional choices.

Challenge #1: Stop Confusing Above-Market Pay with Competitive Pay

Competitive pay does not require paying every employee above market. Few organizations can (or should) target the 75th percentile across the entire workforce.

Instead, leaders need to decide where higher compensation creates the greatest business value.

• Which positions are hardest to replace?
• Where would turnover create the most disruption?
• Which capabilities will the organization need most over the next several years?

For many agricultural organizations, that may include those in sales positions, credit professionals, ag lenders, relationship managers, specialized technical experts, and future leaders. Other positions may be appropriately paid near the market median rate.

Challenge #2: Your Biggest Compensation Problem May Not Be Compensation

When employees are frustrated, cooperatives often assume pay is the issue. Sometimes it is. But frequently, the real problem is the gap between expectations and reality.

During times of prosperity, employees become accustomed to predictable organizational growth, strong incentive payouts, larger merit increases, and frequent advancement opportunities. When the economy changes but expectations do not, even reasonable compensation decisions can feel disappointing.

That is why leaders should spend less time explaining merit matrices and more time explaining:

• How compensation decisions are made
• How organizational performance affects rewards
• What an employee can realistically expect in the coming years

Employees also need help understanding that inflation and labor-market movement are not the same thing. It’s an economic reality that prices can rise without employers increasing wages at the same rate. 

Challenge #3: Reevaluate What Performance You Reward

Many incentive plans were designed during years of growth. If business conditions have changed significantly but incentive measures have not, the organization may be rewarding behaviors that no longer support its priorities.

During a high-growth economy, incentive plans may emphasize:

• Loan or revenue growth
• Production volume
• Market expansion

In a more challenging environment, credit quality, risk management, operational efficiency, member retention, customer satisfaction, and expense management may become more important.

An incentive plan tells employees what matters. Leaders should make sure it delivers the right message for the environment the organization is operating in today, not the one it enjoyed five years ago.

Challenge #4: Treat Pay Compression as a Current Problem

Cooperatives have spent years increasing starting pay to compete in a tight labor market. This creates pay compression, where experienced employees earn only marginally more than newer hires.

Managers often recognize the problem but feel unable to address it within limited budgets. Ignoring compression, however, can lead to disengagement, turnover, perceived inequity, and less motivation to pursue advancement.

The answer does not have to be an immediate, organization-wide correction. Human Resources and leaders can identify the jobs with the greatest compression risk, determine which employees are most affected, and develop a multi-year plan for addressing the most serious gaps.

Limited resources may slow the solution, but they should not prevent cooperatives from having a strategy. The cost of addressing compression is often lower than the cost of replacing experienced talent. Leveraging quality market data is a good starting point. 

Challenge #5: Make Total Rewards Concrete

When compensation budgets tighten, leaders often begin talking more about culture. Employees quickly recognize when “culture” is being used as a substitute for pay.

That does not mean total rewards are irrelevant. It means they must be specific and credible.

Retirement contributions, healthcare coverage, flexibility, paid leave, career development, leadership opportunities, and financial wellness programs all have value. Organizations that can explain (and, when possible, quantify) those benefits will help employees see the value of those non-cash benefits.

The goal is not to distract employees from compensation. It is to help them understand the complete employment proposition and make informed comparisons.

The Bottom Line

Organizations that succeed over the next several years may not be those that spend the most. They will be the ones willing to make deliberate choices about where compensation dollars create the greatest value.

That requires leaders to ask:

• Are we having conversations to help employees understand their total rewards?
• Are we rewarding the outcomes that matter most today?
• Are we investing in talent most critical to our future?
• Are employee expectations aligned with economic reality?
• Are we addressing actual compensation problems – or reacting to every expression of dissatisfaction?

A tough ag economy does not eliminate the need for competitive compensation. It changes what competitiveness requires.