merit increase bonus proj officers wages key talent Critical … · 2017. 11. 21. · Spend Wisely This data demonstrates why typical salary increase distribution practices simply

Includes expert perspectives from:

base salary nonexemptincreasecompensation

salary structures perform

merit increase bonus projofficers wages key talent

global projectedbonus

variable pay philosophy

increasesperformance

frequencypromotional oFeaturing Expert Contributors: In this executive briefing, WorldatWork highlights salary budget survey data that should be top-of-mind for any senior leader approving budget recommendations and pairs it with perspectives and advice from three experts in the field:

Tom McMullen, Senior Client Partner

Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research

Critical Considerations for Pay Increase PlanningExecutive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’

After year-over-year spikes in pay increase budgets

following the 2008 recession, plans for pay increases

have stalled at around the 3% mark for most industries,

regions, states, cities and organization sizes. U.S.

businesses are planning to an average of 3.1% pay

increases for employees in 2017, according to the

“WorldatWork 2016–2017 Salary Budget Survey,”

although average pay increase budgets have been

projected at 3.1% and finalized at 3% since 2014. While

there is some variation when looking at demographic

cuts of data, many HR leaders are left asking:

❚ Will accelerated growth in pay increase budgets resume?

❚ Do small differences in pay increase budgets for my market matter?

❚ Can we really differentiate with such modest pay increase budgets?

Keep Your Eye on the Ball Page 1

Sweat the Small Stuff Page 3

Spend Wisely Page 5

Juan Pablo Gonzalez, Partner

Critical Considerations for Pay Increase Planning PAGE 1

F inal pay increase budgets in the

United States have averaged 3%

for a third year in a row, and experts

predict more of the same until upward

pressure develops. Pay increases simply

aren’t growing, even with almost full

employment achieved in the United States,

an increasing number of job openings and

modest gains in overall gross domestic

product (GDP). Any significant wage

growth is weighed down by a roughly 1%

inflation rate, declining labor force partici-

pation, changing employment regulations,

international economic uncertainty and

global threats of violence.

ANY SIGNIFICANT WAGE GROWTH IS WEIGHED DOWN BY A ROUGHLY

1% INFLATION RATE

Yes, a rise in pay increase budgets could

be expected if inflation picks up, based on

past correlations to that index. However,

that is only true if the host of other forces

at play are ignored. And any rise would

trail inflationary growth by a year because

of the delay from annual budget cycles.

It is worth noting, though, that organiza-

tions have been more inclined to adjust

pay increase budgets mid-year since

the recession.

Keep Your Eye on the Ball

— Tom McMullen, Senior Client Partner, Korn Ferry Hay Group

In the next couple of years, there likely will be some

historically unique upward pressures in base pay given

the regulatory and political landscapes. The minimum

wage is increasing at a more rapid pace across the country.

Multiple organizations, particularly larger organizations and

high-technology organizations, are seriously looking at gender

pay equity gaps and making adjustments as needed. And more

transparency in pay will probably result in increased pressure

to adjust wages upward.

PAGE 2 Executive Briefing on the ‘WorldatWork 2016–2017 Salary Budget Survey’

Even if external forces were subdued,

there are no guarantees that pay

increases would stay around 3%, much

less ever reach pre-recession levels of

4% or more. Conservative, deliberate

spending on pay increases is key, espe-

cially as most successful organizations

are supplementing cash with a full menu

of total rewards programs that satisfy

and engage diverse workforces.

CONSERVATIVE, DELIBERATE SPENDING ON

PAY INCREASES IS KEY

Given that competitive position is

important to most organizations, routine

benchmarking of pay increase budgets

against competitive labor markets,

either annually or more frequently,

remains best practice. Organizations that

don’t keep an eye on the competition

could suddenly be paying too much or,

worse, too little, resulting in the loss of

key talent. ■

Key talent is the operative term here. High performers,

high potentials and employees with scarce skills will

continue to be immensely valuable to employers, and the

price for this talent will remain at a premium, even if the economy

takes a turn for the worse. In time, we expect to see some separation

in the workforce and in how employers make human capital invest-

ments, moving consistently from one-size-fits-all approaches, such

as undifferentiated salary increases, to more precise targeting of

compensation toward key talent and through variable pay programs.

This refinement is made possible through advances in human

capital analytics.

— Juan Pablo Gonzalez, Partner, Axiom Consulting Partners

Labor Market Demographics with Greatest Salary Budget Increase Variance

Industry

U.S. Region

U.S. State

Organization Size

Major Metropolitan

Area


A s overall average pay increase

budgets have slowed, there also

has been a convergence of reported

figures in the 2% to 4% range, with more

than 85% of organizations budgeting

for pay increases in this range. However,

most variances in data from year-to-year

or between demographic comparisons

of data are much smaller, and the impor-

tance of identifying an accurate value can

be shrouded by what appears to be an

insignificant tenth of a percentage-point

difference for a given labor market.

Employers competing for on-site employees must

contend with myriad issues that arise on a loca-

tion-by-location basis. From new market entrants that

can increase the level of competition for talent (ask anyone who

has ever had a well-known national company open a new facility in

their backyard), to hyper-local issues like traffic patterns, access to

public transportation and the cost of parking, local labor markets

often act independently of regional — much less national — trends.

Sweat the Small Stuff


If your total salary budget =

every 1/10th of a percentage point in pay increase budget

110

85% OF ORGANIZATIONSARE BUDGETING FOR PAY

INCREASES IN THE

2% TO 4% RANGE


Going into another year in which company budgets for

pay raises essentially remain steady at 3%, we observe

in both our client work and our own research that

achieving pay-for-performance differentiation matters tremen-

dously. Individual levels of performance and related rewards

become less meaningful if the 3% is applied with a “peanut butter”

or broad-brush philosophy, and can squander the very results that

most companies’ reward strategies seek to achieve. We do see

some differentiation in base pay increases based on performance,

with top performers getting increases of 4.6% relative to the

3% budget.


While small differences in a pay increase budget can

have significant implications for an employer, they are

only visible to employees when they result in significantly

larger or smaller increases that are linked to performance.

Demographic breakdowns of pay increase

budget data in the “WorldatWork 2016–

2017 Salary Budget Survey” revealed that

most differences by industry, location

and organization size are smaller than

three-tenths of a percentage point.

So, why bother going beyond overall

national data?

Organizations that prefer round, whole

numbers need to beware: ignoring differ-

ences of a few tenths of a percentage

point (or less) still can result in paying too

much or too little, potentially by thou-

sands, hundreds of thousands, or even

millions of dollars.

Additionally, those small differences from

national averages represent the activities

of labor competitors. Brushing off the

minutia of the data can spell disaster for

competitive positioning, if competing

for talent in industries and/or areas that

must adjust pay increase budgets to a

greater degree, up or down, than the

national market. ■

— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research, Willis Towers Watson

BRUSHING OFF THE MINUTIA OF THE DATA

CAN SPELL DISASTER FOR COMPETITIVE POSITIONING.


Organizations are attempting to

differentiate base pay increases

and variable pay awards by individual

performance, according to various

findings in the “WorldatWork 2016–

2017 Salary Budget Survey.” Merit

increase are two to four times more

common than nonperformance-based

pay increases. High performers are

receiving an average award of 3.9%,

and middle performers sit at just

2.7%. (Low performers average a

0.7% increase.)

Spend Wisely

This data demonstrates why typical salary increase

distribution practices simply don’t work. Applying these

percentages to employees earning $50,000 annually

results in the higher performer earning an increase that is just $600

more than that earned by the average performer. That’s a little more

than $23 per pay period before taxes.


HIGH PERFORMERS ARE RECEIVING AN AVERAGE AWARD OF

3.9% ...

MIDDLE PERFORMERS SIT AT JUST

2.7%.


High performers have been receiving

44% to 48% larger increases than their

middle-performer counterparts for a

while. In addition, a strong majority of

organizations use variable pay programs

that are, at least in part, based on indi-

vidual performance. However, the survey

also found that U.S. organizations, on

average, pay some base pay increase to

nearly all employees. So, are employers

really differentiating? Probably not

sufficiently. And who is the differentiation

structure catering to? Top performers who

are key to the organization’s success?

Or the broad-base of middle to mid-low

performers who aren’t helping to achieve

organizational goals? Top performers

are at risk without strong differentia-

tion in rewards.

Regardless of the size of the pay

increase budget, wise spending is

essential. But smaller pay increase

budgets require consideration of a

larger differentiation between high and

middle performers, even if affording

it means giving those who are at or

below satisfactory performance little to

no increase. ■

Risky Business of the “Peanut Butter Spread”

Differentiation between high and middle performer pay increases

Performance level at greatest risk for low engagement and high turnover

<50% (“The peanut butter spread”) LOW PERFORMERS

MIDDLE PERFORMERS

HIGH PERFORMERS

>100% LOW PERFORMERS

MIDDLE PERFORMERS

HIGH PERFORMERS

Many organizations struggle to reduce the percentage increase

of salaries of middle-level performers. Oftentimes, these

organizations rate fewer employees below satisfactory than

above satisfactory, making it difficult to fund above-average increases.

While a traditional salary increase matrix is the reality that many

organizations face, it flies in the face of pragmatism. Few managers would

agree to trade a high performer for an average one, but this is what

happens when salary increases are insufficiently differentiated based

on performance.


In addition to differentiation, we are starting to see employers

questioning how salary budgets are spent, how they’re deter-

mining individual increases and, indeed, even the use of the

annual salary cycle. There is an increasing argument for taking a more

holistic view of employees’ performance, skill set and potential when

determining the pay increase versus just the rear-view mirror that the

annual performance rating often represents. We also see wide ongoing

use of variable incentives, which give employers more latitude in

rewarding superior performance.

— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research, Willis Towers Watson


Spend Wisely (continued)

Increasing ROI on compensation will require re-thinking

assumptions about salary increase differentiation, pay distri-

bution and frequency. Increasing the salaries of fewer

employees in any given year frees up dollars to provide meaningful

increases for those employees whose achievements merit significant

increases in compensation. Providing larger salary increases for signifi-

cant growth in capability, and doing so every two to three years instead

of annually, will increase the visibility and impact of these increases. It

also more closely aligns with competency development. This achieve-

ment-based compensation approach, coupled with variable pay eligi-

bility to all employees, better aligns pay with performance and talent

with the execution of strategy.


INCREASING THE SALARIES OF FEWER EMPLOYEES ...

FREES UP DOLLARSTO PROVIDE MEANINGFUL

INCREASES FOR THOSE

EMPLOYEES WHOSE ACHIEVEMENTS MERIT SIGNIFICANT INCREASES IN

COMPENSATION.

The bottom line? This matters right now. Research we

conducted earlier in 2016 shows that three in 10 employees

are likely to leave their employers in the next two years, and

exactly half of U.S. employers are having difficulty attracting top

performers. Pay is still a top driver of both attraction and retention,

and we don’t see that changing any time soon. Employers need to

stay vigilant in rewarding top talent accordingly so they don’t take their

contributions elsewhere.

3 IN 10 EMPLOYEESARE LIKELY TO LEAVE THEIR

EMPLOYERS IN THE NEXT

2 YEARS

— Laura Sejen, Managing Director, Head of Human Capital & Benefits Integrated Intellectual Capital & Research Willis Towers Watson


The survey indicates that 95% or more of organizations

provide a base salary increase to 95% or more of their

employees. Everybody gets a salary increase. Yet, few of

these organizations provide adequate differentiation in increases

between average and superior employees. As noted, the vast majority

of organizations provide a 1.5-times difference or less in increases

between these two groups of employees. For a 3% salary increase

budget, that’s only 4.5% for superior performers. Not much to

capture attention.

How about this for a radical idea: Instead of treating 95% or 100%

of employees with a salary increase, imagine if organizations

rewarded, say, 65% or 75% of their employees in a given year. Some

employees wouldn’t receive an increase due to performance (conser-

vatively, 5% to 10%), but many (20% to 25%) wouldn’t receive an

increase that year due to already being paid relatively high against

the market and their peers.

Why do most organizations continue to provide an annual salary

increase when employee base salaries are already 15% or 25% above

market? Getting to range maximum shouldn’t be an entitlement for

most employees. Consider stretching out the timing of the “annual”

increase review to 18 to 24 months for this group. It’s easier to do

something like this in a low inflation market. All too often there is an

“incrementalism” mindset, with both employees and management

regarding the rate of salary increase versus the total base salary an

employee earns relative to market (and peers) in any given year.

The math here would result in the typical 3% salary increase

budget becoming a much healthier 4% or 4.6% average for those

receiving, with top performers likely receiving double-digit salary

increases in those organizations with decent

performance distributions.

— Tom McMullen, Senior Client Partner, Korn Ferry Hay Group

WHY DO MOST ORGANIZATIONS CONTINUE TO PROVIDE AN

ANNUAL SALARY INCREASEWHEN EMPLOYEE BASE SALARIES

ARE ALREADY

15% OR 25% ABOVE MARKET?

base salarycompensation



global bonus

variable pay

performance

promotional

base salary nonexemptincreasecompensation



global projectedbonus

variable pay philosophy

increasesperformance

frequencypromotional

WorldatWork is in its 43rd year of providing salary budget

data that is critical for compensation planning and

maintaining competitive positioning within a labor market.

The survey gathers data for 19 countries (including the

United States and Canada) and covers:

❚ Base salary increases

❚ Merit budgets

❚ Salary structure adjustments (United States only)

❚ Promotional increases (United States only)

❚ Variable pay plans (United States only)

Survey participants and subscribers receive the “Executive

Report & Analysis” and access to the “Online Reporting

Tool,” allowing users to slice the data according to

individual needs and to compare organization data to other

organizations across regions or industries.

Visit www.worldatwork.org/salarybudgetsurvey

for more information.

About WorldatWork® The Total Rewards Association

WorldatWork (www.worldatwork.org) is a nonprofit human resources association for professionals and organizations focused on compen-sation, benefits, work-life effectiveness and total rewards — strategies to attract, motivate and retain an engaged and productive workforce. WorldatWork and its affiliates provide comprehensive education, certification, research, advocacy and community, enhancing careers of professionals and, ultimately, achieving better results for the orga-nizations they serve. WorldatWork has more than 70,000 members and subscribers worldwide; 80 percent of Fortune 500 companies employ a WorldatWork member. Founded in 1955, WorldatWork is affiliated with more than 70 local human resources associations and has offices in Scottsdale, Ariz., and Washington, D.C.

WorldatWork Society of Certified Professionals® is the certifying body for six prestigious designations: the Certified Compensation Professional® (CCP®), Certified Benefits Professional® (CBP), Global Remuneration Professional (GRP®), Work-Life Certified Professional® (WLCP®), Certified Sales Compensation Professional (CSCP)® and Certified Executive Compensation Professional (CECP)®.

The WorldatWork group of registered marks also includes: Alliance for Work-Life Progress or AWLP, workspan and WorldatWork Journal.

©WorldatWork 2016

1609J5073

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merit increase bonus proj officers wages key talent Critical … · 2017. 11. 21. · Spend Wisely This data demonstrates why typical salary increase distribution practices simply