As 2009 draws to a close, many companies will be putting the final touches to the business plans and budgets that will guide decisions and set the tone for the year ahead.

In most cases, the exercise will be conducted with a greater degree of optimism than 12 months ago. Key economic indicators for Hong Kong are now generally heading in the right direction and there is good reason to believe that the worst of the recession is probably behind us.

However, that certainly does not mean that a return to the comparative boom times of 2007 is just around the corner. Companies must still worry constantly about sales growth and profitability, and continue to keep a tight rein on operating costs, general expenditure and salaries.

Therefore, employees who have experienced the direct effects of belt-tightening measures this year should not get their hopes too high when their performance appraisal and salary review comes around.

They may have been obliged to accept some combination of pay cut, longer hours, cancelled bonus and deferred promotion to help their company through the slump. And there may now be plenty of talk of brighter economic prospects and expansion. But the reality is that it can take a long time for the initial signs of an upturn to convert into higher revenues, solid profits and new opportunities.

Therefore, both employers and individual staff need to plan their strategies for next year very carefully. Yet it is necessary to reward, motivate and retain the people on whom the company has relied and will depend. Somehow, this must be done without yet having significantly bigger compensation budgets to spend.

On the other hand, employees will have to consider, as always, where their best long-term interests really lie. It might be tempting to emphasise hardships suffered and assume that the new year should bring a greatly improved pay deal.

The stance in negotiations may be to state demands and be ready to move elsewhere. But it is also important to remember that even in an improving job market, employers still generally hold the upper hand and promises made to entice someone to a new role may not always turn out as expected.

Slowly but surely, the balance of power in salary negotiations may once again shift in favour of employees over the next few months. Such a swing, though, will definitely not happen on January1 and even the most sought after or apparently indispensable employees would be unwise to think they can start to dictate their own terms.

In facing up to the challenges of the situation, corporate executives - and human resources managers in particular - will have to tread a careful line. They still must find ways to keep costs tightly under control, while rewarding performance, acknowledging loyalty and offering incentives.

What we see when acting as consultants is that the usual procedure in most companies is for a few senior personnel to retreat into the boardroom to map out a strategy. There seems to be very little direct discussion to sound out department heads or line managers on the best ways to connect and engage with staff in order to explain the constraints.

One of our usual recommendations is that the success of every such year-end review and strategy session depends on communication. Companies like to hold themselves up as good communicators who make a special effort to brief staff regularly and keep them informed. The only problem is that this generally centres on actions taken or decisions already made. There is rarely enough focus on asking for ideas, feedback or alternative points of view.

Consequently, when the chosen few sit down to finalise compensation and benefit strategies for the following year, they run the risk of overlooking the obvious and not fully appreciating attitudes among the workforce. In contrast, there is fortunately a growing number of companies which, for example, explained openly and in detail why part-time work or unpaid leave would be necessary this year. They involved staff in the decision and won greater co-operation as a result.

Learning from this, the important thing is to be similarly methodical in reviewing the "employee value proposition" for the next year. Broadly speaking, the key is to let individuals feel part of the process while, of course, taking due note of market practice, actual revenues and reasonable expectations.

Moreover, a review of the employment deal is not just about salaries and promotions. It is also the opportunity to consider longer-term goals, succession planning and wide-ranging questions which should include the following:

• Which markets and individual employees are most critical to short-term returns and long-term growth?
• Given a choice, which benefits do employees most appreciate?
• How can we redefine career paths and gear them to future needs?
• Is the basis for rewards logical and linked fairly to performance measures?
• Why do we expect employees to stay if we don't reward them well?
• Do employees really understand the corporate strategy and feel suitably inspired by the chance to achieve it?

Taking this approach will oblige employers to be self-critical, far-sighted and relatively creative. To have a proper framework and maintain perspective, it makes sense for them to take the following steps: 

Use facts instead of perceptions In every business, executives may encourage and be willing to listen to opinions. At the end of the day, though, decisions are based as much as possible on facts, figures and reliable evidence. Therefore, anyone making a case for or against a certain viewpoint should avoid vague statements or emotional appeals in favour of something more concrete. 

Be ready to make smart decisions Many executives unnecessarily restrict their own ability to manoeuvre. They allow self-imposed rules and timetables to limit their options and, therefore, can miss all kinds of opportunities. To give one example, most organisations still think in terms of an annual bonus for staff and direct attention towards that. In principle, though, there is no reason not to award a quarterly or one-off bonus to a department or individual performing exceptionally well during the year. Doing something like this shows awareness, flexibility and immediacy. It is also a sign of astute management, since it can give new motivation and an obvious reason to stay. 

Segment and focus on key talent The economy has forced employers to examine compensation practices and think again about the right mix of skills, productivity and affordability. It is therefore vital to understand which people and which activities contribute most directly to the bottom line and to recognise those efforts accordingly. Looking ahead, employers also need to consider carefully who and what will drive future growth, and implement measures to retain or recruit relevant employees. 

Strike a deal that works for both Assuming executives and HR managers will not have unlimited funds at their disposal, they must be more creative in putting together remuneration packages tailored to individual needs. Rather than giving higher cash rewards, this might mean offering, for example, broader medical insurance, study subsidies or job rotations. 

Be transparent and involve employees The economic crisis has made most employees feel more anxious than ever about bonus, salary and promotion prospects, with attendant doubts about whether they can really believe what their company is telling them. For an employer, the best approach is to be transparent and rebuild trust by letting staff at different levels understand what goes into the decision-making process. Usually, the organisations that come through a crisis successfully are those that commit to frequent, open and honest communications with employees, no matter how tough the message may be.

Written by Justin Liu, principal of human capital business in Hong Kong at Mercer, a global provider of consulting, outsourcing and investment services.