In this environment, organizations can choose to accept the status quo and keep their compensation practices the same; as the "WorldatWork 2013-2014 Salary Budget Survey" shows, there has been little change in salary increase budget projections for the past three years, even as the economy continues its slow recovery.
However, particularly in this economy, companies need to innovate in their compensation practices in order to attract and retain talent while saving money. There is an opportunity to be more strategic about how to distribute investments in compensation that can help the bottom line.
Following are three ways organizations can get more bang for their buck from their compensation programs.
The salary budget survey results showed that paying for performance through merit increases is three-to-five times more common than other types of pay increases. This type of salary increase results directly from performance management and assessment outcomes. Furthermore, WorldatWork survey data from the past four years show that the difference between average performers and highly rated performers is increasing; those who are highest rated typically received 152% more than mid-level performers. Subsequently, it is, and will continue to be, more difficult for organizations to appropriately compensate and retain top performers as organizations compete on salary for top talent.
Organizations that are more stringent with their rating systems — that move away from a forced bell curve distribution of ratings — can be more selective about what qualifies as high-performing talent. Organizations that better delineate between performance levels and are more aggressive in reserving top ratings for truly exceptional performers may be able to more effectively redistribute their salary increase budgets. This redistribution can allow them to compensate talent at or above market level and reward high performers in critical roles with meaningful increases in pay. In addition, annual performance standards may need to continuously increase. Otherwise, all employees will either be shown the door or rise to the top ratings, making performance differentiation difficult and potentially less meaningful and more difficult to reward.
Organizations are beginning to invest more in employee engagement in an effort to target high-potential candidates or those with critical skills. WorldatWork survey data show that the percentage of organizations investing in these types of programs has been increasing since 2010 and continues to trend upward. From a financial perspective, these programs include spot bonuses or project completion bonuses. Nonfinancial awards include sponsored conferences, professional development events, recognition awards and enriched job sharing/flexible hours. Variable pay budgets, often used to fund these programs, have also been on the rise since 2011.
Incentives can be useful for rewarding employees for achieving excellent short-term results closer to the time of achievement, not necessarily when they materially increase an employee's level of capability or competence, as has been the traditional practice. As these programs become more prevalent, organizations can expect talent to look for rewards outside of base salary increases throughout the year as high-quality work is completed.
According to WorldatWork, more than 95% of organizations report that pay increases are awarded every 12 months, with the average being close to 12 months. However, this historical trend has been changing. More organizations are reporting "15, 18 or 24 months between raises, causing the average time to increase." A previous Axiom study published in workspan in 2009, "Planning for the New Normal," foreshadowed organizations moving to a system where "salary adjustments … are linked to significant competency growth, promotion or significant labor market movement [and these adjustments will occur] less frequently than today's annual increases."
While organizations now seem to be moving in this direction, it is not yet the norm. However, linking increases in pay to increases in capability or market value rather than timing should be considered in combination with other adjustments to compensation practices as a way to more closely link achievement of results to rewards. This may enable organizations to increase the amount of time between pay increases. In addition, with a redefined rating system, there may be cost savings available through base salary administration, even within today's limited budgets.
Flat salary budgets are no excuse for keeping the same old compensation practices. In fact, current conditions are precisely the right time to better align pay increases to true performance improvement, deploy timely rewards programs and link rewards to increases in capability rather than the calendar.
About the Authors
Juan Pablo Gonzalez is a partner at Axiom Consulting Partners in Washington, D.C. Kate Richardson is a principal at Axiom Consulting Partners in Washington, D.C. Hemali Desai is a consultant at Axiom Consulting Partners in Chicago.
Read the October edition of Compensation Focus.
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