Economic Cycle and Effective Compensation Management : Realigning Fixed and Variable Pay

Various phases of economic cycle are characterized by changes in the dynamics of the economy. In particular, expansion phases are periods when economic activity tends to trend up such as recovery and growth period, whereas recession phases are periods when economic activity tends to trend down such as period of recession and slump. Understanding these phases has been the focus of management researchers to mitigate negative impacts of business cycle on the organizations. Realigning fixed and variable pay in the pay structure helps organizations in maintaining proper leverage ratio for mitigating adverse impact of recession on profitability and survival of the organization. This article provides a compensation management framework for properly designing pay structure, and explains with the empirical analysis fixed and variable pay relationship, and effective management of operating leverage during different stages of economic cycle for effective compensation management in the organizations