As signs of autumn emerge, with pumpkin spice filling the air and students everywhere doing their math homework, companies are working on their own math: next year’s salary budgets.
Employees hoping for big raises across the board will be sorely disappointed. For the sixth year in a row, average pay increases are pegged at 3 percent, according to four different surveys. Heftier hikes appear to have gone the way of employer-provided turkeys at the holidays and golden watches at retirement.
One big reason is the continued economic uncertainty and nervousness about the upcoming election, according to Kerry Chou, senior practice leader for WorldatWork's compensation practice.
"Companies are holding in their treasuries" as a hedge against another downturn. "It’s not necessarily a bad strategy," Chou told Bloomberg BNA, but it’s one of the main reasons pay increases have held steady over the last six years. "There’s not a lot of capital investment," Chou said.
Instead, organizations are looking to spend their compensation dollars on top performing and critical skill employees, and they’re rewarding those who meet set goals. Most of the surveys—from WorldatWork, The Conference Board, the Hay Group division of Korn Ferry and Willis Towers Watson—found that raises for high performance and skilled employees are substantially higher than the average 3 percent given to everyone else, and often supplemented with bonuses.
It’s a policy evolution, according to Matteo Tonello, managing director of The Conference Board’s Corporate Leadership Practice. "Over the years, the compensation mix has changed—the percentage of base pay decreases year by year," he told Bloomberg BNA.
Companies are favoring an easily adjustable bonus approach, especially when they need to tailor their search for talent to the specific circumstances of the job market, Tonello said. Bonuses, which are used in attracting and retaining desirable talent, tend to be given out to top-performing employees, he said.
Pay increases have been low for so many years that managers find it difficult to differentiate for performance among their employees, according to Laura Sejen, Willis Towers Watson’s Rewards managing director.
"Since there’s an entitlement mentality, maybe we should just stop with merit pay increases," Sejen said. Instead, companies should set salaries at a competitive market level and people should receive pay adjustments according to their skill and demand.
Research from Willis Towers Watson found that bonuses are based on overall company performance, but distributed based on individual performance. "Our records show that most companies do try to differentiate, but not as much as plan design calls for," which means there is more work to be done on improving variable pay programs, according to Sejen.
Managers are taking a more comprehensive view, considering the importance of individual roles in addition to employee performance, Sejen said. Managers look at whether the employee has the skill set for current and future roles when determining raises and bonuses. "Those are valid and important considerations," she said.
The approach can be a positive step, but depends on the quality—and training—of the manager, according to Sejen. Managerial quality is part of the challenge, she said. This issue affects retention as well, since managers are often the reason that employees stay at an organization or leave it.
Companies are also looking to provide employees with non-financial reasons to stay, such as mentoring, career development and meaningful work, according to Tom McMullen, Korn Ferry Hay Group’s North American Total Rewards Expertise Leader. In some cases, employers can send employees the message that "we may not pay the best but you can drive your own career and advance yourself," he said.
Again, companies are more likely to provide these career opportunities to high performance and skilled employees, McMullen said. "There is a subset of talent in some companies where the organizations identify them and build processes to keep the dialogue open in the organization and help advance their careers and interests. Sometimes it includes pay increases, or it could be restricted stock grants. These programs are becoming more prevalent and are definitely the tools organizations are using," he said.
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