As the recession recedes but a full-blown recovery is not firmly in place in the second half of 2010, employers face a delicate balancing act. On the one hand, employees who suffered through a recession without hope of job security—much less a salary increase or bonus—are getting impatient for things to return to normal. On the other hand, the recovery hasn’t proven strong enough for employers to loosen the purse strings very much. The need to control fixed costs remains an important one.
Merit pay budgets are coming back to life, but not across the board. The highest performers get more while the lower performers get less. “We see merit pools for 2010 coming back with a vengeance for top performers,” said Michael Kesner, principal at Deloitte Consulting LLP in Chicago. Kesner puts average merit pay increases for 2010 at 2.5 to 3 percent, with increases of 4 to 8 percent for the highest performers. In addition, “the bonuses for 2010 that will be paid in 2011 in all likelihood are going to be better than the 2009 bonuses paid in 2010,” he said.
Although there is more funding for pay increases and more money to go around, amounts vary dramatically among industries and companies. “I wouldn't by any means describe it as an embarrassment of riches,” said Laury Sejen, global practice leader of rewards for Towers Watson in New York. “Companies are trying to restore, and most have restored, basic merit increase budgets, which took a major hit as many companies basically froze salaries.”
However, just as the impact of the recession hit unevenly, so too is the still-sluggish recovery. As a result, some companies and industries need to be more careful than others, and some are still struggling. Because so many companies froze salaries in 2009, few could get away with freezing them again in 2010. For those companies and others reluctant to invest heavily in salary increases, the challenge is to “think more creatively about how to keep top talent, and above-average talent, with limited financial resources,” said Tom McMullen, North American rewards practice leader with the Hay Group in Chicago.
Still Doing More with Less
In 2010, many employers are taking a wait-and-see approach to compensation for many employee segments. “Retention isn't much of a concern for employers yet,” said Sejen. However, she noted that as the economy improves, companies increasingly are worried about pivotal segments of the workforce—high-potential, critical-skill and top-performing employees.
As salary increases and bonus payouts return, these will be the first beneficiaries. As hiring activity returns in the broader marketplace, these individuals will have the most opportunities to jump ship. As a result, employers might need to work harder to keep these individuals. “When you have less to go around and need to retain certain groups, you need better differentiation than the norm,” said Sejen.
Pay programs are being adjusted as company goals and objectives change. “When the bottom dropped out of the economy, a lot of businesses were fighting for their very survival,” said McMullen. “These companies were scrapping their plans for revenue growth and other strategic priorities to focus on the bottom line in restoring profitability.”
A renewed emphasis on variable pay shows
companies are still worried about fixed costs.
There has been a renewed emphasis on variable pay because companies are still worried about fixed costs. In addition, because variable pay programs tend to reinforce the importance of specific business priorities, companies can use variable pay metrics to reinforce the shift from growth to profitability. “Triggers can be based on profits,” said McMullen. “If the corporation doesn't have the money to fund incentives, it is not under an obligation to do so.”
Enhancing the Value Proposition
As they figure out the best way to manipulate the levers of cash compensation, employers can take steps to improve the value proposition they can offer to the most critical segments of the workforce. Such improvements don’t have to cost a lot of money, even when they have the potential to generate a significant return. In many cases, changes to the value proposition simply involve giving employees flexibility in terms of when they come and go and how they get their work done. For example, if career development or flexible work schedules are important to those employees, employers can invest accordingly.
The importance of this value proposition is already becoming apparent to employers. Sejen noted that, in 2008, 75 percent of employers said that they had an informal value proposition and 25 percent had a formal one. As of 2010, those numbers are reversed, with 75 percent having a formal value proposition and 25 percent an informal one. “Companies that are not communicating actively about their value proposition are losing an opportunity for better employee engagement,” said Sejen.
At the same time, companies might need to reassess their overall pay structures, particularly if a company’s overall goals and strategic focus have shifted. How do those changes affect compensation in terms of performance metrics and funding, and how well is the company differentiating pay based on performance?
When times are good and budgets are flush, companies are less apt to notice sloppy performance management, poor market appraisals and ineffective goal setting. Moreover, these issues are less apt to have an impact on organizational performance. However, these are not flush times. “This might be the time to repair the cracks in the foundation,” said McMullen. “There is an argument to be made for auditing compensation design and administration to make sure that pay programs are achieving the companies’ intended goals and that those goals are still relevant.”
Saying 'Thank You'
The recession made many employees much more aware of and focused on security. Companies that had layoffs or cut compensation and benefits programs, such as 401(k)-matching contributions, might be able to generate goodwill among employees by acknowledging the fact that employees are doing more with less and by saying thanks for staying with the company during a tough time.
Joanne Sammer is a New Jersey-based freelance writer. Her articles have appeared in numerous publications, including HR Magazine.
Most Employers Expect to Give Pay Raises in 2011, SHRM Online Compensation Discipline, August 2010
Salary Survey Projects Modest Increases for 2011, SHRM Online Compensation Discipline, July 2010
Bonuses Are Back, with Emphasis on Hard Measures, SHRM Online Compensation Discipline, July 2010
Pay vs. Intangibles: Which Rewards Best Motivate, Engage?, SHRM Online Compensation Discipline, July 2010
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data Center
SHRM Metro Economic Outlook reports