Employers Budgeting for Retention in 2017

Tighter labor market puts pressure on pay budgets

Stephen Miller, CEBS By Stephen Miller, CEBS November 23, 2016
Employers Budgeting for Retention in 2017

Employers are preparing to pay more in 2017 to retain high-performing and high-potential employees, as well as those with in-demand skills, as the labor market continues to tighten.

Fifty-three percent of respondents to Xerox HR Services' Compensation Planning for 2017 survey indicated that one of their biggest labor concerns in the coming year is to retain top talent. The survey, completed in October, collected data on pay practices from 172 organizations across the U.S. representing both small and large companies.

While the survey, conducted annually, showed that average merit-based pay raises across the board are expected to remain at 3 percent next year, a trend that's been consistent since 2012 (and on par with other 2017 pay forecasts), 37 percent of employers also will consider market-based pay adjustments for high-performing and high-potential employees with the goal of keeping their pay competitive—and keeping them onboard.

Planning for an Unpredictable Year

"On first look, very little has changed since last year," the survey report notes. However, pressures resulting from economic growth "may have a meaningful impact on company budgets in 2017."

"Attracting and retaining top talent is increasingly critical, and organizations need to continue—or start—finding creative ways to do so," said John Gentry, president of Xerox HR Services. For instance, "offering career development opportunities as a retention tool for top performers was a priority for over 60 percent of participants this year. In addition, companies are applying specific criteria to determine and adjust market-based pay for high-potential employees."

[SHRM members-only toolkit: Building a Market-Based Pay Structure from Scratch]

Among the key survey findings:

  • Median base pay budget will increase by 3 percent. The median salary budget for 2015 and 2016 increased 3 percent and is projected to remain stable at a 3 percent increase for 2017, reflecting no change in base salary budgets since 2012. Median salary budgets have grown above 3 percent since 2008. However, 20 percent of participants plan to offer more aggressive base pay increases for specific functional areas, with information technology and engineering cited most commonly.

  • Performance ratings increase pay differentiation. The most prevalent employee performance-rating scale continues to use five levels to differentiate performance for purposes of base pay increases (54 percent of respondents used this model). In earlier years, the survey found that the lowest performer was likely to receive no base pay increase; however, 2015 and 2016 saw small increases for even the lowest performers among most respondents.

  • Short-term incentive (bonus) program participation is increasing across all employee groups. The most prevalent incentive criterion is a combination of individual and organizationwide performance metrics.

  • Approximately half of companies use lump-sum payments to reward employees who have reached or are above their pay range maximums. The average lump-sum payment as a percent of base salary ranged from 3.6 percent for C-suite level to 2.3 percent for nonexempt employees.

  • Companies use referral bonuses commonly at the director/senior manager level and below. Ninety-five percent of respondents provide referral bonuses for at least one level in the organization. Referral bonus amounts range from a median of $500 for nonexempt employees to $1,750 for vice presidents/general managers (typically the highest). This represents an increase over 2015 referral bonus amounts for director/senior manager level and above.

  • Geographically adjusted base pay increases. Forty-seven percent of respondents use geographically adjusted pay ranges, most often based on local cost of labor. Only 6 percent of participants reported adjusting for local cost of living in 2016.

[SHRM members-only how-to guide: How to Establish Pay Ranges]

Pay Communication Philosophy

Respondents recognized the importance of communicating with employees about compensation, and most say they are:

  • Communicating the value of total rewards (69 percent).
  • Sharing their compensation philosophy and strategy (64 percent).
  • Providing updates on results related to organizational performance and the potential impact on pay (59 percent).

Employers were less likely to share with employees the full pay structure for jobs within the same class or group (30 percent) or possible pay increases associated with particular levels of performance or steps within a pay structure (22 percent).

Nevertheless, "Organizations are acknowledging employees' desire for more transparency around total rewards," Gentry said. "Providing information on compensation philosophy and strategy, as well as business results, helps employees understand the effect on their pay and the value or their contributions to the organization."

Related SHRM Articles:

Bonus Binge: Variable Pay Outpaces Salary, SHRM Online Compensation, August 2016

Salary Budgets Expected to Rise 3% in 2017, SHRM Online Compensation, July 2016

Related Resource:

ERI's Guide to 2017 Salary Increase Planning, Economic Research Institute, November 2016

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