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Still Doing Across-the-Board 3 Percent Salary Increase? Why You Need To Shift

After what seemed like years of headlines focused on “stagnant wages,” salary increase budgets are finally climbing up in 2018, as near-record-low unemployment keeps the talent market tight.

In line with this growing competition for top talent, World at Work’s 2018 annual budget survey found that the average salary increase budgeting increased from 2017 to 2018, from 3 percent to 3.1 percent. Furthermore, most organizations are projecting an additional compensation budget increase to 3.2 percent in 2019.

The reason is indeed the fear of losing top talent. Each year, PayScale surveys thousands of organizations on how they pay and how they manage the business of compensation. In the 2018 Compensation Best Practices Report (CBPR), fifty-nine percent of respondents reported this concern as a reason for raising wages in 2018. In fact, some organizations increased their compensation budget by significantly more, with 9 percent of respondent organizations budgeting for increases greater than 5 percent.

But before you panic over any looming “bidding war” for the best employees, consider this: if you’re trying to recruit and retain the best and brightest, your compensation budget may not have to change all that much. Instead, it’s about making smart choices about how you allocate your compensation budget to different segments of your employee population, when you pay, and how you rationalize your salary decisions to employees. So, how might you make some different choices about your salary budget going forward that can move the dial on employee engagement? Below, we’ll share four ideas to consider as you go about your budgeting process.

1. Do a Market Study
First of all, make sure what you’re paying is tracking with the market. According to PayScale’s CBPR, 52 percent of organizations in 2017 had completed a market study of job prices within the past year. Tellingly, given the current labor market,17 percent of organizations now price individual jobs in the market at least weekly, up from 13 percent the year before.

Completing a market study will tell you whether your ranges are competitive with the market, and whether your current compensation strategy is holding up.

2. Correct Existing Inequities in Pay
Is each department in your organization paid equitably? What about by position levels? Any inequities there? Have you taken the time to do a gender pay audit? As for jobs, perhaps pay for some positions has moved faster in this volatile market than others. From year over year, pay for some jobs may increase as much as 10 percent or more, while others may stay the same, and some may even decline. For that reason, be sure to review your critical positions on a quarterly basis, at least.

3. Be Clear About Your Reasons for Giving Raises
Organizations seeking to be employers of choice will do well by knowing exactly what they want to reward with their comp dollars and then sticking to their choices consistently. Do you want to give raises based on individual performance and results, attainment of certain skills, or when team or company-level goals have been met? Linking pay raises to performance and market rates for the job is one of the best ways to instill the sense that pay process is fair and transparent. What’s the spread in pay increase between your top performers versus your average performers? Is a 1percent spread a meaningful difference?

4. Build in More Budget For Discretionary Payouts
While organizations have long counted on variable pay to attract and retain talent, we’ve found that the types of variable pay and how orgs are using it are both shifting to allow organizations more flexibility, with the end goal of keeping employees engaged.

For example, organizations are giving out variable pay more frequently than they’ve done previously. In the latest CBPR, we saw that more organizations are giving out variable pay on a quarterly (17 percent of respondents) or monthly basis (10 percent of respondents), rather than on an annual basis. In industries that typically have shorter tenure, such as food and hospitality and tech, nearly a quarter of orgs report paying out bonuses or incentives on a quarterly basis.

In the 2018 CBPR, we found that the use of individualized incentives jumped from last year, from 64 percent to 67 percent. To take the idea of “any-time” rewards further, 39 percent of organizations in our CBPR survey said they give their managers discretionary funding to reward employees. With that in mind, you may want to put some wiggle room in your compensation budget so that there are dollars available for discretionary payouts through the year.

Communicating is How You Win or Lose
While this isn’t strictly on topic, we would feel bad if we didn’t mention the importance of pay communication. After tracking employee engagement for several years, we’ve consistently seen that employee satisfaction is driven much more by the perception that pay is fair and pay process is transparent, rather than the amount of cash one receives.

Compensation, done well, is about landing the message that your organization values its employees. If you want your employees to feel valued, you need to tell employees how you make pay decisions and why you pay the way you do. When employees understand your compensation philosophy and strategy, they won’t need to spend unproductive energy wondering, “Should I be insulted that I only got a 3 percent raise?”

To learn more about how to make the most of your compensation budget to achieve your business goals, visit

Founded in 2002, PayScale pioneered the use of big data and unique matching algorithms to power the world’s most advanced compensation decision platform. PayScale’s platform gives employers a single point of access to diverse datasets and real-time analytics for immediate visibility into the right pay for any position. Key capabilities include: creating structures, benchmarking, survey management, employee communication, and trend reporting. Our cloud compensation software is used by more than 6,500 customers to make salary decisions for more than 17 million employees. For more information, please visit PayScale or follow on Twitter.

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