merit increase bonus proj officers wages key talent …...competitive positioning, if competing for...
TRANSCRIPT
Includes expert perspectives from:
base salary nonexemptincreasecompensation
salary structures perform
merit increase bonus projofficers wages key talent
global projectedbonus
variable pay philosophy
increasesperformance
frequencypromotional oFeaturing Expert Contributors: In this executive briefing, WorldatWork highlights salary budget survey data that should be top-of-mind for any senior leader approving budget recommendations and pairs it with perspectives and advice from three experts in the field:
Tom McMullen, Senior Client Partner
Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research
Critical Considerations for Pay Increase PlanningExecutive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’
After year-over-year spikes in pay increase budgets
following the 2008 recession, plans for pay increases
have stalled at around the 3% mark for most industries,
regions, states, cities and organization sizes. U.S.
businesses are planning to an average of 3.1% pay
increases for employees in 2017, according to the
“WorldatWork 2016–2017 Salary Budget Survey,”
although average pay increase budgets have been
projected at 3.1% and finalized at 3% since 2014. While
there is some variation when looking at demographic
cuts of data, many HR leaders are left asking:
❚ Will accelerated growth in pay increase budgets resume?
❚ Do small differences in pay increase budgets for my market matter?
❚ Can we really differentiate with such modest pay increase budgets?
Keep Your Eye on the Ball Page 1
Sweat the Small Stuff Page 3
Spend Wisely Page 5
Juan Pablo Gonzalez, Partner
Critical Considerations for Pay Increase Planning PAGE 1
F inal pay increase budgets in the
United States have averaged 3%
for a third year in a row, and experts
predict more of the same until upward
pressure develops. Pay increases simply
aren’t growing, even with almost full
employment achieved in the United States,
an increasing number of job openings and
modest gains in overall gross domestic
product (GDP). Any significant wage
growth is weighed down by a roughly 1%
inflation rate, declining labor force partici-
pation, changing employment regulations,
international economic uncertainty and
global threats of violence.
ANY SIGNIFICANT WAGE GROWTH IS WEIGHED DOWN BY A ROUGHLY
1% INFLATION RATE
Yes, a rise in pay increase budgets could
be expected if inflation picks up, based on
past correlations to that index. However,
that is only true if the host of other forces
at play are ignored. And any rise would
trail inflationary growth by a year because
of the delay from annual budget cycles.
It is worth noting, though, that organiza-
tions have been more inclined to adjust
pay increase budgets mid-year since
the recession.
Keep Your Eye on the Ball
— Tom McMullen, Senior Client Partner, Korn Ferry Hay Group
In the next couple of years, there likely will be some
historically unique upward pressures in base pay given
the regulatory and political landscapes. The minimum
wage is increasing at a more rapid pace across the country.
Multiple organizations, particularly larger organizations and
high-technology organizations, are seriously looking at gender
pay equity gaps and making adjustments as needed. And more
transparency in pay will probably result in increased pressure
to adjust wages upward.
PAGE 2 Executive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’
Even if external forces were subdued,
there are no guarantees that pay
increases would stay around 3%, much
less ever reach pre-recession levels of
4% or more. Conservative, deliberate
spending on pay increases is key, espe-
cially as most successful organizations
are supplementing cash with a full menu
of total rewards programs that satisfy
and engage diverse workforces.
CONSERVATIVE, DELIBERATE SPENDING ON
PAY INCREASES IS KEY
Given that competitive position is
important to most organizations, routine
benchmarking of pay increase budgets
against competitive labor markets,
either annually or more frequently,
remains best practice. Organizations that
don’t keep an eye on the competition
could suddenly be paying too much or,
worse, too little, resulting in the loss of
key talent. ■
Key talent is the operative term here. High performers,
high potentials and employees with scarce skills will
continue to be immensely valuable to employers, and the
price for this talent will remain at a premium, even if the economy
takes a turn for the worse. In time, we expect to see some separation
in the workforce and in how employers make human capital invest-
ments, moving consistently from one-size-fits-all approaches, such
as undifferentiated salary increases, to more precise targeting of
compensation toward key talent and through variable pay programs.
This refinement is made possible through advances in human
capital analytics.
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
Labor Market Demographics with Greatest Salary Budget Increase Variance
Industry
U.S. Region
U.S. State
Organization Size
Major Metropolitan
Area
Critical Considerations for Pay Increase Planning PAGE 3
A s overall average pay increase
budgets have slowed, there also
has been a convergence of reported
figures in the 2% to 4% range, with more
than 85% of organizations budgeting
for pay increases in this range. However,
most variances in data from year-to-year
or between demographic comparisons
of data are much smaller, and the impor-
tance of identifying an accurate value can
be shrouded by what appears to be an
insignificant tenth of a percentage-point
difference for a given labor market.
Employers competing for on-site employees must
contend with myriad issues that arise on a loca-
tion-by-location basis. From new market entrants that
can increase the level of competition for talent (ask anyone who
has ever had a well-known national company open a new facility in
their backyard), to hyper-local issues like traffic patterns, access to
public transportation and the cost of parking, local labor markets
often act independently of regional — much less national — trends.
Sweat the Small Stuff
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
If your total salary budget =
every 1/10th of a percentage point in pay increase budget
110
85% OF ORGANIZATIONSARE BUDGETING FOR PAY
INCREASES IN THE
2% TO 4% RANGE
PAGE 4 Executive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’
Going into another year in which company budgets for
pay raises essentially remain steady at 3%, we observe
in both our client work and our own research that
achieving pay-for-performance differentiation matters tremen-
dously. Individual levels of performance and related rewards
become less meaningful if the 3% is applied with a “peanut butter”
or broad-brush philosophy, and can squander the very results that
most companies’ reward strategies seek to achieve. We do see
some differentiation in base pay increases based on performance,
with top performers getting increases of 4.6% relative to the
3% budget.
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
While small differences in a pay increase budget can
have significant implications for an employer, they are
only visible to employees when they result in significantly
larger or smaller increases that are linked to performance.
Demographic breakdowns of pay increase
budget data in the “WorldatWork 2016–
2017 Salary Budget Survey” revealed that
most differences by industry, location
and organization size are smaller than
three-tenths of a percentage point.
So, why bother going beyond overall
national data?
Organizations that prefer round, whole
numbers need to beware: ignoring differ-
ences of a few tenths of a percentage
point (or less) still can result in paying too
much or too little, potentially by thou-
sands, hundreds of thousands, or even
millions of dollars.
Additionally, those small differences from
national averages represent the activities
of labor competitors. Brushing off the
minutia of the data can spell disaster for
competitive positioning, if competing
for talent in industries and/or areas that
must adjust pay increase budgets to a
greater degree, up or down, than the
national market. ■
— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research, Willis Towers Watson
BRUSHING OFF THE MINUTIA OF THE DATA
CAN SPELL DISASTER FOR COMPETITIVE POSITIONING.
Critical Considerations for Pay Increase Planning PAGE 5
Organizations are attempting to
differentiate base pay increases
and variable pay awards by individual
performance, according to various
findings in the “WorldatWork 2016–
2017 Salary Budget Survey.” Merit
increase are two to four times more
common than nonperformance-based
pay increases. High performers are
receiving an average award of 3.9%,
and middle performers sit at just
2.7%. (Low performers average a
0.7% increase.)
Spend Wisely
This data demonstrates why typical salary increase
distribution practices simply don’t work. Applying these
percentages to employees earning $50,000 annually
results in the higher performer earning an increase that is just $600
more than that earned by the average performer. That’s a little more
than $23 per pay period before taxes.
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
HIGH PERFORMERS ARE RECEIVING AN AVERAGE AWARD OF
3.9% ...
MIDDLE PERFORMERS SIT AT JUST
2.7%.
PAGE 6 Executive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’
High performers have been receiving
44% to 48% larger increases than their
middle-performer counterparts for a
while. In addition, a strong majority of
organizations use variable pay programs
that are, at least in part, based on indi-
vidual performance. However, the survey
also found that U.S. organizations, on
average, pay some base pay increase to
nearly all employees. So, are employers
really differentiating? Probably not
sufficiently. And who is the differentiation
structure catering to? Top performers who
are key to the organization’s success?
Or the broad-base of middle to mid-low
performers who aren’t helping to achieve
organizational goals? Top performers
are at risk without strong differentia-
tion in rewards.
Regardless of the size of the pay
increase budget, wise spending is
essential. But smaller pay increase
budgets require consideration of a
larger differentiation between high and
middle performers, even if affording
it means giving those who are at or
below satisfactory performance little to
no increase. ■
Risky Business of the “Peanut Butter Spread”
Differentiation between high and middle performer pay increases
Performance level at greatest risk for low engagement and high turnover
<50% (“The peanut butter spread”) LOW PERFORMERS
MIDDLE PERFORMERS
HIGH PERFORMERS
>100% LOW PERFORMERS
MIDDLE PERFORMERS
HIGH PERFORMERS
Many organizations struggle to reduce the percentage increase
of salaries of middle-level performers. Oftentimes, these
organizations rate fewer employees below satisfactory than
above satisfactory, making it difficult to fund above-average increases.
While a traditional salary increase matrix is the reality that many
organizations face, it flies in the face of pragmatism. Few managers would
agree to trade a high performer for an average one, but this is what
happens when salary increases are insufficiently differentiated based
on performance.
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
In addition to differentiation, we are starting to see employers
questioning how salary budgets are spent, how they’re deter-
mining individual increases and, indeed, even the use of the
annual salary cycle. There is an increasing argument for taking a more
holistic view of employees’ performance, skill set and potential when
determining the pay increase versus just the rear-view mirror that the
annual performance rating often represents. We also see wide ongoing
use of variable incentives, which give employers more latitude in
rewarding superior performance.
— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research, Willis Towers Watson
Critical Considerations for Pay Increase Planning PAGE 7
Spend Wisely (continued)
Increasing ROI on compensation will require re-thinking
assumptions about salary increase differentiation, pay distri-
bution and frequency. Increasing the salaries of fewer
employees in any given year frees up dollars to provide meaningful
increases for those employees whose achievements merit significant
increases in compensation. Providing larger salary increases for signifi-
cant growth in capability, and doing so every two to three years instead
of annually, will increase the visibility and impact of these increases. It
also more closely aligns with competency development. This achieve-
ment-based compensation approach, coupled with variable pay eligi-
bility to all employees, better aligns pay with performance and talent
with the execution of strategy.
— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners
INCREASING THE SALARIES OF FEWER EMPLOYEES ...
FREES UP DOLLARSTO PROVIDE MEANINGFUL
INCREASES FOR THOSE
EMPLOYEES WHOSE ACHIEVEMENTS MERIT SIGNIFICANT INCREASES IN
COMPENSATION.
The bottom line? This matters right now. Research we
conducted earlier in 2016 shows that three in 10 employees
are likely to leave their employers in the next two years, and
exactly half of U.S. employers are having difficulty attracting top
performers. Pay is still a top driver of both attraction and retention,
and we don’t see that changing any time soon. Employers need to
stay vigilant in rewarding top talent accordingly so they don’t take their
contributions elsewhere.
3 IN 10 EMPLOYEESARE LIKELY TO LEAVE THEIR
EMPLOYERS IN THE NEXT
2 YEARS
— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research Willis Towers Watson
PAGE 8 Executive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’
The survey indicates that 95% or more of organizations
provide a base salary increase to 95% or more of their
employees. Everybody gets a salary increase. Yet, few of
these organizations provide adequate differentiation in increases
between average and superior employees. As noted, the vast majority
of organizations provide a 1.5-times difference or less in increases
between these two groups of employees. For a 3% salary increase
budget, that’s only 4.5% for superior performers. Not much to
capture attention.
How about this for a radical idea: Instead of treating 95% or 100%
of employees with a salary increase, imagine if organizations
rewarded, say, 65% or 75% of their employees in a given year. Some
employees wouldn’t receive an increase due to performance (conser-
vatively, 5% to 10%), but many (20% to 25%) wouldn’t receive an
increase that year due to already being paid relatively high against
the market and their peers.
Why do most organizations continue to provide an annual salary
increase when employee base salaries are already 15% or 25% above
market? Getting to range maximum shouldn’t be an entitlement for
most employees. Consider stretching out the timing of the “annual”
increase review to 18 to 24 months for this group. It’s easier to do
something like this in a low inflation market. All too often there is an
“incrementalism” mindset, with both employees and management
regarding the rate of salary increase versus the total base salary an
employee earns relative to market (and peers) in any given year.
The math here would result in the typical 3% salary increase
budget becoming a much healthier 4% or 4.6% average for those
receiving, with top performers likely receiving double-digit salary
increases in those organizations with decent
performance distributions.
— Tom McMullen, Senior Client Partner, Korn Ferry Hay Group
WHY DO MOST ORGANIZATIONS CONTINUE TO PROVIDE AN
ANNUAL SALARY INCREASEWHEN EMPLOYEE BASE SALARIES
ARE ALREADY
15% OR 25% ABOVE MARKET?
base salarycompensation
salary structures perform
merit increase bonus projofficers wages key talent
global bonus
variable pay
performance
promotional
base salary nonexemptincreasecompensation
salary structures perform
merit increase bonus projofficers wages key talent
global projectedbonus
variable pay philosophy
increasesperformance
frequencypromotional
WorldatWork is in its 43rd year of providing salary budget
data that is critical for compensation planning and
maintaining competitive positioning within a labor market.
The survey gathers data for 19 countries (including the
United States and Canada) and covers:
❚ Base salary increases
❚ Merit budgets
❚ Salary structure adjustments (United States only)
❚ Promotional increases (United States only)
❚ Variable pay plans (United States only)
Survey participants and subscribers receive the “Executive
Report & Analysis” and access to the “Online Reporting
Tool,” allowing users to slice the data according to
individual needs and to compare organization data to other
organizations across regions or industries.
Visit www.worldatwork.org/salarybudgetsurvey
for more information.
About WorldatWork® The Total Rewards Association
WorldatWork (www.worldatwork.org) is a nonprofit human resources association for professionals and organizations focused on compen-sation, benefits, work-life effectiveness and total rewards — strategies to attract, motivate and retain an engaged and productive workforce. WorldatWork and its affiliates provide comprehensive education, certification, research, advocacy and community, enhancing careers of professionals and, ultimately, achieving better results for the orga-nizations they serve. WorldatWork has more than 70,000 members and subscribers worldwide; 80 percent of Fortune 500 companies employ a WorldatWork member. Founded in 1955, WorldatWork is affiliated with more than 70 local human resources associations and has offices in Scottsdale, Ariz., and Washington, D.C.
WorldatWork Society of Certified Professionals® is the certifying body for six prestigious designations: the Certified Compensation Professional® (CCP®), Certified Benefits Professional® (CBP), Global Remuneration Professional (GRP®), Work-Life Certified Professional® (WLCP®), Certified Sales Compensation Professional (CSCP)® and Certified Executive Compensation Professional (CECP)®.
The WorldatWork group of registered marks also includes: Alliance for Work-Life Progress or AWLP, workspan and WorldatWork Journal.
©WorldatWork 2016
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