Employee-Retention Costs Driving Wage Hikes As Surveys Find Pay Programs Falling Short

By Larry Reynolds

Raises for employees, not the cost of new hires, have become the main contributor to wage growth, indicating that employers are focusing on retaining talent, according to the 2014 ADP Workforce Vitality report, issued Oct. 8 by payroll service provider Automatic Data Processing Inc.

In the third quarter of 2014, real after-inflation wages accelerated after years of stagnation, the report's workforce vitality index showed. Hourly pay for private-sector workers was up 4.5 percent in the third quarter, compared with a year earlier, the report said.

Seventy-one percent of employers plan to raise staff salaries in 2015 based on expected growth, executive recruiting company Korn Ferry said Oct. 23 in a news release on a survey of 518 executives from Sept. 17 to Oct. 20, 2014.

Ninety percent of executives plan to give year-end bonuses in 2014, and 36 percent plan to increase bonuses in 2014 versus 2013, Korn Ferry said. “Bonuses and salary increases underscore that there is a huge cost to replacing great people,” said Nels Olson, vice chairman and co-leader of the company's board and chief executive officer services practice.

Less Distinction Between Performance Levels

Companies are falling short in how they manage their base pay and incentive programs, and making less of a distinction among performance levels, Towers Watson said in a Sept. 8 news release on recent survey findings.

The Towers Watson Data Services Salary Budget Survey, conducted in June and July 2014, found that “the top 10 percent of employees are expected to receive bonuses that are 25 percent larger than those given to employees who met expectations,” the news release said. “In 2010, those same top performers received bonuses that were 30 percent larger than those of workers who met expectations.”

Thirty percent of employers plan to give bonuses to workers who failed to meet performance expectations, an increase from 2013 when nearly one-fourth gave bonuses to workers with the lowest ranking, Towers Watson said. High-performing workers are expected to receive larger pay raises and above-target annual bonuses, but employers are differentiating pay levels less based on performance compared with previous years, and underfunded bonus pools means less money to reward star performers, it said.

Avoiding Missed Opportunities

Forty percent of workers said there is a clear link between pay and performance, and 59 percent said their company does a good job explaining pay programs, according to the Towers Watson Global Workforce Study, conducted in April and May 2014. “Pay really matters to employees when they make decisions about whether to join or stay with a company,” said Laura Sejen, Tower Watson's managing director of rewards. “Simply offering a competitive salary and annual bonus is not enough to win the war for talent. Employees believe that employers are falling short in how pay decisions are made and that there is much room for improvement.”

To contact the reporter on this story: Larry Reynolds in Washington at lreynolds@bna.com

To contact the editor responsible for this story: Michael Baer at mbaer@bna.com