Compensation Practices Becoming More Formal, Rigorous

By SHRM Online staff Oct 16, 2012
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Pay programs and practices at many organizations are evolving. A new study, Compensation Programs and Practices 2012, compares pay practices from 2003 onward, revealing that formalized compensation programs that include written philosophies, salary structures and active performance management are increasingly prevalent, even among small organizations.

The survey data were collected in July 2012 among members of WorldatWork, an association of HR/total rewards professionals at mostly large North American companies.

“For a vast majority of organizations, employee compensationis one of the largest operational expenses and the most difficult to manage,” said Kerry Chou, practice leader at WorldatWork. “We expect to see more compensation professionals applying discipline and rigor to the design and management of pay programs to ensure business objectives are met.”

Popular Pay Program Features

Among the study findings:

Compensation philosophy—

More organizations are adopting a formal, written compensation philosophy that ensures a compensation program supports the organization’s culture (67 percent in 2012, up from 61 percent in 2010).

Salary structure design and administration—85 percent of organizations have a formal salary structure. While there are several types of pay structures, salary grade structures are the most prevalent, in place at 86 percent of organizations. The use of broadbands, popular in the 1980s and 1990s, has plummeted; broadbands now are used by only 8 percent of respondents.

Pay for performance—Almost all organizations (99 percent) assess employee performance. A majority (71 percent) of organizations have a formal employee performance rating system. Moreover, measuring individual performance against management or personal objectives has gained popularity and is used by three out of five organizations. This trend suggests that performance goals and objectives are being set in a deliberate and employee-specific manner, as opposed to using generic performance objectives that may be found on boilerplate position descriptions.

In addition, 85 percent of multinational respondents indicate that their performance management program is applied worldwide.

Pay communications—Nearly 80 percent of surveyed companies report they communicate pay to employees, using brief written or verbal communications, at least once a year. Nearly 8 in 10 respondents indicate that employees have individual discussions with their supervisor regarding pay programs.

Job evaluation methods—Compensation managers useseveral methods to determine the relative value of jobs: market pricing, ranking, classification and point factor. Market pricing, however, is predominant: 9 out of 10 organizations use market pricing to some degree, while 50 percent use it exclusively. The point-factor approach, the most common method a few decades ago, is far behind at 20 percent.

Variable pay—Variable pay (bonuses and other types of incentive compensation) were used by 84 percent of organizations in 2012 up from 80 percent in 2010. More than three-fourths of organizations award bonuses and two-thirds award recognition payments, such as spot awards. With regard to incentive plans, a majority of organizations use individual or performance-sharing plans; however, while the use of individual incentives (other than sales incentives) fell from 67 percent in 2010 to 59 percent in 2012, performance-sharing plans (based on financial or nonfinancial goals other than company profits) ticked up from 57 percent to 58 percent. Profit-sharing plans remained steady at 19 percent.

Among organizations with multinational operations, 47 percent say all employees worldwide generally participate in the same programs—although some flexibility is provided to countries or regions to make limited adaptations to corporate programs or to install local programs of nominal cost.

Prevalence of Variable Pay Plans

2012

2010

Individual incentives (other than sales incentives)

59%

67%

Recognition (e.g., spot awards)

66%

60%

Bonuses (e.g., sign-on and retention)

76%

59%

Performance-sharing (e.g., gainsharing plans based on financial goals other than profits or on nonfinancial goals)

58%

57%

Profit-sharing

19%

19%

Source: WorldatWork Compensation Programs and Practices 2012.

“The drop in individual incentives may have to do with employees having lost some confidence that their individual incentive plans will pay out, especially during the recession and slow economic recovery,” Chou told SHRM Online. For instance, “Many organizations have moved toward a retention bonus arrangement, where as long as the employee remains with the firm and performs, the payment will be made. This may be why the use of bonuses has increased substantially from 2010.”

WorldatWork has posted a video ​based on this report.​

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