As businesses settle into the new, post-recession normal for employee compensation, most employers have realized the value of articulating a compensation philosophy—and of creating formal, written policies for carrying it out.
Yet, according to a new compensation study by the nonprofit WorldatWork organization, few employees understand those philosophies or policies.
The confusion may stem, in part, from a lack of communication about compensation from HR to the staff. The study shows that more than a third of businesses admit to sharing “minimal” pay-related information with workers.
Add to that the quickly and frequently changing basis for salary levels and pay raises, and it’s hardly a surprise that employees can’t keep up.
Equal, across-the-board increases and years-of-service bumps have all but fallen off the map. They were once the go-to methods for determining pay raises. The WorldatWork survey of 1,001 compensation pros shows that just 12% of organizations give everyone the same raise—although that’s up from 11% two years ago. Only 9% of employers said they rely on years of service to determine increases, down from 10% in 2010.
(For more details on how employers determine raises, see box below.)
Instead, today’s favorite basis for pay is performance, as measured against job standards. In fact, 70% of the HR pros participating in the study said high performers receive bigger raises than average performers get. A quarter said top performers often get double the raises of average workers.
Still, while 66% of the HR pros in the study name pay-for-performance as measured against job standards as their preferred method, that number is down from 73% in 2010.
Increasingly common is pay-for-performance as measured against management objectives or personal objectives. It jumped from 44% of organizations in 2010 to 58% in 2012.
That suggests that pay is becoming more personal: Rather than basing salary levels and raises on generic performance objectives or on how closely an employee fulfills the functions of his or her position description, managers are tying rewards to goals set specifically for each employee.
There are several compensation trends to watch this year.
3% merit pay bump
Merit increases in 2013 will hover around 3%, according to a survey of 270 large multinational companies by compensation consulting firm Empsight International.
It calls the bump “a real gain in income” because it is greater than the rate of inflation.
The report notes that large companies have thawed the salary freezes of the past two years and are focusing on competitive pay to aid in employee retention and reduce skill shortages.
The survey numbers confirm a Mercer forecast, which predicts the average raise in base pay for next year will be 2.9%, up from 2.7% this year.
Starting pay up for techies
Starting salaries for employees in technology jobs are likely to jump by 5.3% in 2013, outpacing increases among other professionals, according to Robert Half International, which released its 2013 Salary Guides in October.
Reason: A “supply-and-demand imbalance for specialized talent” in the field, says Robert Half CEO Max Messmer.
Administrative and office staff could see their base compensation jump by an average of 3.5%, while accounting and finance pros can look forward to a boost of 3.3%, the staffing services firm estimates.
Sales incentives on the rise
Sales professionals enjoyed slightly higher pay raises last year than employees in other fields, as their incentive checks increased by 5%.
That exceeded the budget of 3% set at the beginning of the year, according to a fall survey by The Alexander Group.
Seeking bang for the buck
Pay for performance allows organizations to reward their top performers for good work.
But a study by the Harvard-based consulting firm Best Practices notes that pay-for-performance systems solve another problem equally well: They stop firms from overpaying underperforming employees.
Still, the report, “Driving Growth & Talent Retention through Pay for Performance,” uncovers a glitch: Few employers have figured out how to eliminate the “entitlement culture” long-ingrained by so many years of traditional, across-the-board pay raises.
Benefits squeeze compensation
The rising cost of health care could be stifling pay increases, notes William Wiatrowski, associate commissioner of the Bureau of Labor Statistics. “There’s only so many dollars, [so employers] find ways to offset increasing costs,” he said during a fall C-SPAN interview. Wiatrowski mentioned high-deductible health plans as one such cost-cutting measure.
Christopher Flavelle, an analyst for the Bloomberg Government news service observes that in tough times, employees are more likely to discount benefits as part of their overall compensation. “It means that although they are getting more from their employers, they might not see it as cash in their pocket,” Flavelle notes, especially when it comes to health care benefits.
Possible solution: Lead employees through the math of your total compensation system, explaining the value of both pay and your organization’s contribution to benefits.
Newsflash: Pay still motivates!
Bonuses and promotions top a work- force list of the most effective ways to keep employees engaged, notes the latest Randstad Engagement Index. Yet just 27% of workers in the survey say their employers offer either.
Who gets how much? How employers determine raises
Pay for performance has become the norm at most companies when it comes to determining pay raises, but not every organization follows the practice. In fact, how performance is measured has changed.
Here is a breakdown of how employers determine base salary increases:
Source: WorldatWork “Compensation Programs and Practices 2012” study
