The 3-Percent Solution  

Recent surveys report that U.S. employer base pay, while on the upswing, is still slowed by weak economic growth. But employers are shifting focus to bonuses, more frequent pay adjustments, variable pay and increased differentiation based on performance.

Thursday, August 29, 2013
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When it comes to base pay increases for U.S. workers in 2014, it seems the magic number is three. Which is not bad, say compensation experts at some of the top consulting firms, considering where it had been during and shortly after the recent recession.

Firms such as Mercer, WorldatWork, Hay Group and The Conference Board all predict salary base pay increases will be at or about 3 percent in the next year.

While that increase may make some HR executives worry about morale, the upside is that many employers are trying hard to offer higher numbers in rewarding their top performers.

According to Mercer's survey results this summer, for example, the average raise in base pay is expected to be 2.9 percent in 2014, modestly rising from 2.8 percent in 2013 and 2.7 percent in 2012 and 2011. Salary increases for top-performing employees, which Mercer estimates is about 7 percent of the workforce, will be higher as companies continue to focus on retaining top talent.

"Employers realize their greatest challenge is to retain top performers to avoid post-recessionary flight of these valuable assets. This means they have to reward and recognize them," says Jeanie Adkins, a Louisville, Ky.-based partner and co-leader of Mercer's rewards practice. "This includes providing higher pay increases, along with other non-cash rewards such as training opportunities and career development."

Adkins says that, as employers seek enhanced ways to pay for performance, they are segmenting their workforce mainly by high-performing as well as high-potential employees. As a result, companies are rewarding these employees with significantly larger increases than those in the lower-performing categories. Mercer's survey shows the highest-performing received average base pay increases of 4.6 percent in 2013, compared to 2.6 percent for average performers and 0.2 percent for the lowest performers.

"In an improved economy, top performers continue to get salary increases nearly twice that of an average performer, which indicates that pay for performance is alive and well in the annual merit process," Adkins says. "Differentiation of salary increases based on performance is now commonplace and remains an effective way for employers to recognize those employees that enhance the company's competitiveness and contribute to its success."

In addition to workforce segmentation, organizations are studying the key drivers of employee engagement and targeting certain groups, such as high-potentials or those with critical skills, with enhanced reward programs. Moreover, they are investing in a variety of practices to strengthen employee engagement and help improve work/life balance overall for employees. According to Mercer's survey, some of the more prevalent practices include sponsored conferences, professional development events, additional non-monetary recognition awards, and enriched job sharing/flexible hours.

"Employers are clearly starting to see the value of assessing and addressing their workforce needs systematically," Adkins said. "They recognize that engaged employees are less likely to seek job opportunities outside of the company, and therefore, have a more positive influence and impact on both team and business performance."

In its survey, the WorldatWork 2013-2014 Salary Budget Survey, that entity projects that U.S. employers' budget increases in base pay for 2014 will be at 3.1 percent, which, if achieved, says Kerry Chou, senior compensation practice leader for Scottsdale, Ariz.-based WorldatWork, would be the first average increase above 3 percent since 2008.

"Salary budgets continue to improve, albeit slowly," Chou says. "This data adds to the jobs numbers painting an economic picture that shows the U.S. economy is not gaining much momentum. Organizations continue to be challenged in finding meaningful ways beyond 3-percent raises to reward talent."

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Chou adds that budgets that remain below historical levels heighten the need for better execution of pay programs, which includes pay transparency and good communication, knowledgeable line managers who can discuss pay decisions with employees, and meaningful differentiation in increases between high performers and other workers.

In fact, he says, weak salary increase budgets are not stopping employers from rewarding talent.  Survey respondents from U.S. companies are focusing on bonuses, more frequent adjustments, variable pay and increased differentiation based on performance.

Along with Mercer and WorldatWork, research from the Hay Group and The Conference Board also project median base salary increases of 3 percent in 2014.

In somewhat of a contrast, Towers Watson, in its Talent Management and Rewards Pulse Survey released in mid-August, reports that North American employers do not expect to fully fund their annual employee bonuses this year, marking the third consecutive year and seventh time since 2005 that their bonus pools for annual incentives will be below target. Additionally, Towers Watson found, one in four employers will pay bonuses to workers who fail to meet performance expectations. And that raises the question as to whether employers are receiving a good ROI in these plans.

"Employers continue to take a conservative approach to funding their bonus pools while the strength of the economy remains both uneven and uncertain," says Laura Sejen, global rewards leader at Towers Watson in New York. She says that while the vast majority of employers have some type of annual incentive plan, the way some incentive plans are designed and viewed by employees raises the question of whether employers are getting their money's worth.

According to that report, 18 percent fail to set differences in target payouts based on employee performance. Other recent Towers Watson research shows that employees view annual incentive plans as being ineffective, are not a key driver of sustainable engagement and are not a strong source of attraction and retention.

"Companies may need to take a hard look at the design and delivery of their incentive programs to ensure they are meeting their objectives within the total rewards portfolio," Sejen says.

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