When It Comes to Merit and Base Pay, Employers Focus on In-Demand Skills

Oct. 10, 2017 — Flat merit increases seem to be customary these days, but even as employers deal with a changing jobs landscape, lower unemployment and new roles in the workplace, not everyone is seeing smaller pay raises.

Base pay for certain jobs — those that require in-demand skillsets — is advancing at a faster pace, according to Mercer's "2017/2018 U.S. Compensation Planning Survey." Likewise, the firm's "2017 U.S. Mercer Benchmark Database" reveals that jobs like Social Media Communications Professional and Senior Engineering Technologist are experiencing base salary pay movement of 5.8% and 5.4%, respectively.

"While companies are holding the line on increases to fixed compensation, they are getting much smarter about how they distribute those budgets, focusing on in-demand skills and jobs emerging from new ways of doing business," said Mary Ann Sardone, partner and Mercer's North America workforce rewards practice leader. "Clearly, jobs that represent critical skills aligned with company growth are being prioritized when it comes to pay."

Also, as a result of balancing rewards programs with flat budgets and the need to attract and retain critical talent, organizations often look to promotions as a tool to advance employee pay; the typical promotional increase for professionals ranges from 7% to 12%. New to this year's survey, Mercer incorporated promotion budgets through a new category, "total increase budgets," which takes into consideration not only merit increases, cost-of-living adjustments and across-the-board increases, but promotions as well.

"Total increase budgets were 3.4% in 2017, which reflects a more realistic picture of pay movement in organizations," Sardone said. "While it may not be the best approach to advancing pay, we know promotion is often used as the answer to common challenges of rewarding critical-skill workers, retaining top performers, and motivating high-potential employees when the annual merit increase falls short."

Differentiation of salary increases by employee performance continues to be an approach that organizations use to deliver on a limited budget. Highest-performing employees are receiving base-pay increases that are nearly twice that of average performers and four times that of second-lowest performers, according to Mercer's survey. Typically, more than half of an organization's employees fall in the middle-performance category, so organizations must work out how to deal with the bulk of their workforce while focusing dollars on performers who are driving their business strategy and limiting dollars on those who are not.

"Bottom line, employees who perform below expectations can expect little increase in pay — it's the reality of pay for performance adopted by most companies today," Sardone said.

In planning for 2018, Mercer's survey revealed that organizations continue to put retention and attraction concerns at the top of their list and these concerns have grown significantly since last year (75% and 71%, respectively). With limited budgets for pay adjustments, organizations are investing in a variety of practices to strengthen the value proposition beyond the contractual compensation and benefits programs.

"Programs that support career development and overall well-being are becoming popular ways to differentiate as the labor market tightens," Sardone said. "Companies realize that competing on pay alone is an expensive proposition, so standing out in other areas is a cost-effective way to create an attractive employee value proposition."

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