Taking the Pulse on Pay

As predictions for next year's compensation levels roll out, experts say all signs are pointing to an employee-driven market with an increased employer emphasis on variable pay.

Wednesday, September 23, 2015
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By many accounts, 2015 was supposed to be a good year for compensation, in which employers would loosen the purse strings and pay increases would return to more ‘normal’ (or pre-recession) levels. It actually has been, but not quite in the way that some expected.

As evidence, consider the findings of two recent compensation studies from Aon Hewitt and WorldatWork. The two workforce research firms say base pay rate increases this year have been 2.9 percent, and 3.1 percent respectively. Both numbers fall within fractions of a percentage point of what each predicted for 2014.

Adding further support is a separate compensation study by Robert Half International, which looked at compensation trends in five specific industries (accounting and finance; technology; creative and marketing; administrative and office support; and legal). That study finds that base pay increases were 4.1 percent on average in those sectors.

But these numbers are only half the story. The three firms also confirm that variable pay (the percentage of income that is based on bonus or at-risk compensation) is increasing. Variable pay has become a favorite tool by many organizations to drive employee performance without making long-term payroll commitments.

Perhaps also being driven by continued economic uncertainty and market volatility, variable pay practices actually rose to record levels this year, says Aon Hewitt’s practice leader Ken Abosch in Chicago.

“In 2015, 12.9 percent of payroll is being invested in these types of arrangements. That is the highest level that we’ve seen in the 39 years that we’ve been doing the study,” Abosch says. For its 2015 U.S. Salary Increase Survey, Aon Hewitt surveyed 1,214 organizations.

“What we’re observing is that organizations are still under huge pressures to minimize cost,” Abosch says. “Labor costs, if not the most expensive, are in the top three for an organization. If you break that down further, 75 percent of an organization’s labor costs are usually in the form of base salaries. “

“The issue with that is that it’s also a fixed cost component,” Abosch continues. “That’s why we see organizations holding back and not pushing their salary increase budgets beyond 2.1 percent, 2.9 percent or 3 percent of payroll. They don’t want fixed costs to dramatically.”

There are two clear advantages for HR executives.

“When you give someone a $100 base salary increase it has a compounding impact,” Abosch notes. “That can quickly go out of control. When you give someone a $100 bonus they get the bonus for that year and then they start over at zero for the next year. Organizations have also observed that employees like to be included in variable pay arrangements. It creates greater focus on key initiatives. It is effective in changing behaviors.”

But base pay rate increases certainly aren’t being ignored, says Brett Good, senior district president at Robert Half International. That firm has the largest estimate of base pay increases for 2015 – at 4.1 percent. Good stresses that they can be considerably higher for the right workers.

Take information technology, which the federal Bureau of Labor Statistics recently confirmed to be the hottest job market of all entering the third quarter.

“In the networking and mobile applications areas, we’re seeing increases of as much as 9.7 and close to 10 percent,” Good notes.

Pay-rate increases – whether base pay or variable pay – are driven by the overall job market, of course, and Good says all the signs point to an employee’s market in many sectors.

“We are seeing an environment right now where it’s not unusual to have counter-offers or multiple offers for some job seekers,” Good says. “That is what employers are telling us – CFOs, CIOs, etc. They expect a dramatic improvement in business over the next year.”

If the predictions by Robert Half International prove true, it will impact HR in two significant ways. First will be the need to revisit existing compensation plans. After all, you don’t want to bring in new hires at pay rates that exceed existing staff doing the same jobs.

The second impact will be the need to re-examine total compensation packages – the full slate of pay, perks and benefits offered to each worker.

Numerous workforce studies claim there is a significant skills gap or labor gap in the job market right now. The truth is probably more of a ‘preferred worker’ gap, according to Alison Avalos, senior research manager at WorldatWork in Scottsdale, Ariz. There are plenty of workers to be had, she says, but is just taking a bit longer for HR execs to find and lure candidates that can hit the ground running on day one with all of the skills and experience desired.

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That trend has had significant impact on salaries, Avalos observes. It is also good news for both employers and employees.

“I absolutely think that gone are the days that you get a pay increase for showing up, or can expect a bonus or an on-the-spot cash award just for doing the baseline of what is expected of you,” Avalos stresses. “Organizations have figured out that they get more bangs for their buck if they employ the use of variable pay -- for all levels of employment. You see a larger proportion of that in senior executives and top level management, but we’re seeing it across the board.”

Variable pay also survived the so-called "great recession" of 2008 and 2009 fairly well, Avalos says.

“It’s interesting that, with the recession, we didn’t see the drop off like we did with everything else that we study. Variable pay was fairly consistent,” Avalos says.

Variable pay also makes sense during uncertain times. On the one hand, HR executives need an effective tool for retaining current staff and attracting new talent. On the other, they don’t want to break the bank by inflating fixed operating costs not knowing what lies ahead.

Finally, Avalos says HR executives need to look beyond just base pay and variable pay in the current job market.

“It’s really important to be thinking about the employee and the overall experience that they have,” Avalos concludes. “Make sure you understand who your workforce is and what their needs are. If you can speak to them and reward them on an individual basis you are much more likely to retain them over time.”

“That will also impact their performance and help them deliver what it is you need from them to be successful,” Avalos says. “Compensation is a huge part of it, but there is so much more to an employee’s satisfaction level and engagement level. That is what the last 10 or 15 years is teaching us.”

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