Employers Assessing Salary Programs for Affordability, Competitiveness

As economic indicators slowly climb upward, organizations are beginning to assess the impact that two years of salary freezes and limited pay increase budgets had on their base salary programs. While most organizations have a formal base salary program in place, more than one-third (38 percent) reviewed their program’s design during 2010, according to a Mercer survey.

The 2010 Dollars and Sense Survey, which includes responses from nearly 550 employers across a broad selection of industries throughout the U.S. and Canada, was conducted in July 2010. Findings were released in September 2010.

“Base salary is often the largest component of an employee’s rewards and a significant organizational expense. While employees want to know that it’s fair and competitive, employers want to ensure that budgets allocated for base salaries are affordable, sustainable and supportive of business objectives,” commented Anna Orgera, a principal with Mercer’s Human Capital consulting business.

Salary Program Design

The most common salary program designs, Mercer found, are:

• A traditional salary structure—one that includes a midpoint of 50 percent of pay, a minimum of 80 percent of midpoint and a maximum of 120 percent of midpoint (used by 61 percent of respondents).
• A wide salary structure approach characterized by fewer position grades and more extensive ranges than the traditional salary structure (18 percent).
• Some form of broad-bands (10 percent).

Additionally, more than half (56 percent) of organizations have two or more salary programs with employee group/job level as the biggest differentiator between programs, followed by job family or function and geographic differentials.

To evaluate a job position and determine its salary grade/level/band, most organizations use a market pricing or slotting approach, with 37 percent of organizations applying some form of job evaluation such as job leveling/classification, point factor or whole job ranking. Leading factors for determining the approach are:

• Objectivity and fairness (91 percent).
• Fit with business model and organization structure (86 percent).
• Simplicity in administration (63 percent).
• Ease of communication (62 percent).

The most common reward elements linked to salary grade/level/band are annual incentive targets, used by 60 percent of organizations.

“We are finding increasing interest among U.S. companies in job evaluation and global leveling,” said Orgera. “These employers are looking for an objective basis for HR decision-making and employee communication.”

Base Salary Increases

The most common methods to determine employee salary increases, Mercer found, are:

• Salary increase/merit guidelines or ranges (79 percent).
• Manager discretion to determine pay raises (71 percent).

Less than one-fifth (17 percent) provide cost-of-living/across-the-board adjustments, a finding similar to the 11 percent of U.S. companies shown to provide cost-of-living adjustments in a 2010 WorldatWork survey (see “Cost of Living Adjustments Unpopular Among U.S. Employers”).

Merit increases are the most dominant factor included in annual budgets. Typically, organizations determine increases based on multiple approaches such as salary increase/merit guidelines or ranges, formal merit increase metrics and manager discretion.

In addition, to manage base salaries:

• Almost half (48 percent) of organizations use an average "compa-ratio," or the ratio of base salary to the midpoint of the pay range.
• Two-thirds (67 percent) apply an average compa-ratio of 100 percent as a target.
• Less than one-quarter (24 percent) consider time to midpoint—the number of years it takes an employee that performs at expected levels to reach the salary level midpoint—when managing salaries.

Training and Communicating Salaries

Most organizations train their managers on their compensation programs. According to Mercer’s survey, about two-thirds provide training when the program changes or on an ad hoc or as-requested basis. Fewer (40 percent) provide training annually, while 11 percent do not provide training.

“In just a few years the topic of zero salary increases has become mainstream,” said Orgera. “Employers have concerns about whether their employees will stay once the economy improves, and maintaining employee morale despite stagnant compensation is essential. That’s why coaching managers on compensation-related employee communication is critical.”

The majority (80 percent) of organizations indicate that they inform employees about their base salary program, with more than half conveying base salary philosophy (58 percent). But just a bare majority (51 percent) inform employees about their position's full salary range.

Stephen Milleris an online editor/manager for SHRM.​