Compensating employees during a recession

Compensating employees during a recession is a tricky task for many companies. As (not only) the Czech Republic currently faces one of the highest inflations in the last 25 years, it’s important for businesses to understand how to respond to market fluctuations. In this post, I'll explore different approaches companies can take and why it’s crucial to communicate transparently about their actions.

The most common question I have encountered in the world of VC and startups over the past few months is

“How do companies respond to market fluctuations, such as inflation, and how do they address it?”

📈 Approach 1️ Market data

One approach commonly used by VC-backed companies is to base compensation on local market data rather than adjusting wages based on the inflation rate. This quantitative approach is reflected in compensation databases such as Pave and OptionImpact, but it also has a half-year delay and doesn’t account for future developments.

💰 Approach 2 One-time bonuses

Another approach is to offer one-time bonuses. Increasing wages based on a percentage of inflation is often not suitable because if the trend changes, wages can’t be reduced again. Tracking these fluctuations within a longer-term trend line can be a more flexible solution.

🦺 Approach 3️ Refreshing compensation

Some smaller companies take a proactive approach to refreshing compensation, but it’s important to be aware that fluctuations will always occur and that the risk is that you can only go in one direction. You can’t take money back from employees if there’s a change in the market.

📣 Transparency is not a buzzword

When choosing an approach, it’s important to communicate it effectively to the rest of the company. Dan Hejl from Productboard emphasizes the importance of being cautious and careful when communicating compensation changes, and recommends being transparent about the reasons behind the chosen approach and how it will affect the company’s operation. Transparency is key when it comes to compensation. At Deepnote, we believe it’s important for every employee to be familiar with our compensation principles, which is why we’ve published them on our internal “Wikipedia” on Notion. By being open and transparent about our compensation principles, we’re able to build trust and create a sense of security among our employees.

In conclusion, companies have different approaches to compensating employees during a recession, but it’s crucial to communicate transparently about their actions. By being open and transparent about compensation principles, companies can build trust and create a sense of security among employees.