Employee compensation: 12 trends for 2012

Compensation experts are predicting modest but steady wage growth over the next few years as employers shake off the salary freezes, layoffs and low profits brought on by the recession.

The average pay raise will be modest this year—around 3%, according to a handful of employer surveys. By contrast, raises averaged about 4% from 2005 to 2008.

Still, a recent Forbes story says 2012 could be The Year of the Employee Back­­lash, as workers look for greener pastures after years of corporate slash and burn.Translation: Now’s the time to review your pay structure from a retention perspective.

Twelve pay trends to keep in mind:

 1.  An increasing focus on pay for performance. Employees who get the best results will reap the highest annual raises. “As a result, the gap between high-performing employees and those in the lower-performing categories is widening significantly,” says a new Mercer report (see chart below).

 2.  Alignment of compensation with business goals. The math can be brutally simple in tight times. How much value does each employee add to the organization’s work—and bottom line?

 3.  Raises send a message. High performers won’t just get raises, they’ll get way better raises than others do. HR consultants are advising clients to show their appreciation for MVPs with raises as high as 10%. If that drives off disappointed low performers—who might score a 1% bump—so be it. The consultants’ rationale:That frees up jobs for more productive new hires.

 4.  Smaller merit-pay, larger ­variable-pay budgets. Hewitt Associates researchers project that the average annual merit budget 10 years from now (in 2022) will be 2%. However, variable-pay budgets will run close to 16%.

 5.  Creative budgeting breakouts. Mark Szypko of Kenexa says some companies are splitting pay budgets into two categories: managerial and line employees. It’s not to set up a double standard. The division prevents the top brass from dipping into employee pay budgets to line their own pockets.

Other splits might serve other purposes: Some firms divide their average 3% pay raises into two pots—2% for the whole employee pool, with an additional 1% on top for high performers.

 6.  Broader compensation benchmarking. More organizations will base pay systems on local and industrywide compensation surveys rather than on internal traditions. Business factors—such as recruiting and retention patterns—will be more decisive than how much a position has been worth historically.

 7.  More nonmonetary rewards. Work/life benefits, job flexibility, training and recognition increasingly will fill in for stingier raises. After all, re­­search shows that “qualitative” benefits motivate many employees just as well as money.

 8.  Recalculation of replacement costs. Conventional wisdom says it costs between 50% and 300% of annual salary to replace an employee. Post-recession, that cost has jumped as high as five times salary, says Lena Bottos, a VP at Kenexa. Reason: To reduce turmoil in tough times, hiring man­­agers and HR want to be absolutely sure a new hire will stick.

 9.  A hyper-focus on retention. Because it costs so much to replace valued talent, employers are going all out to keep their current stars. Tip: Consider “re-recruiting” your most valuable em­­ployees by offering bo­­nuses and career advancement—just as you would when wooing an attractive ex­­ternal candidate.

 10.  Restrictions on extra pay. While some companies have stopped layoffs and furloughs, many continue to limit overtime. It’s approved only if calculations say it will reap a return on the investment.

 11.  Better communication with em­ployees. After three years of pay doldrums, you may have fallen out of practice when it comes to addressing compensation. Warm up for better times to come by meeting with employees to review how your compensation system works. Even if there’s nothing new to report, it could improve employee attitudes.

 12.  Updated compensation poli­­cies. Left stagnant, compensation policies quickly go out-of-date. That could render your organization less competitive—especially if merit raises still dominate. Dust off your stale pay structure and job descriptions as part of your renewed focus on recruiting and retention of top talent.

Pay increases in 2012 based on employee performance

Percentage of workforce

Average pay increase

  Highest rated

8%

4.4%

  Next highest-rated

30%

3.6%

  Middle rated

54%

2.8%

  Low rated

6%

1.2%

  Lowest rated

2%

0.4

Source: Mercer U.S. Compensation Planning Survey

Use online tools to benchmark pay rates

Online salary surveys offer a glimpse into what others are paying, often broken down by industry and job category. Some leading online tools:

Advice: Employees and applicants are going online to set their own expectations. Stay one step ahead by regularly reviewing web-based salary info.

Self-test: How smart is your compensation strategy?

1. Do you have a stated compensation policy? A good policy spells out a broad framework within which decisions about starting pay, raises, variable compensation and related issues are made.

2. How well do you explain benefits to employees? Do they understand that benefits comprise a significant portion of their total compensation? Make sure employees understand that benefits have value only when they are used.

3. Do employees have access to reliable information about pay practices? Take control of the rumor mill by offering concrete information about how you (and your supervisors) make pay decisions. Share the formulas you use to calculate merit increases and set variable compensation levels.

4. How much does pay depend on performance? Do employees understand what they have to do to earn a fatter paycheck? Do your merit-increase and variable-pay criteria make sense from an employee’s perspective?

Transparency will help. Make sure everyone believes that compensation is based on a rational system that rewards effort and other measurable contributions.

5. How much do variable pay plans really pay out? No surprise: Employees tend to like plans that actually reward better pay for better performance. If your variable-pay program promises bonuses every year, but no one ever seems to get a bonus, you have a credibility problem.

6. To what extent do compensation and benefits reflect your organization’s values? For example, if you say you’re a customer-driven company, your compensation systems had better reward excellent customer service. If research and development is your competitive advantage, establish bonus criteria that reward creativity and initiative.

7. How would employee dissatisfaction with pay and benefits affect your organization? The morale hit could result in poor employee performance. It could create a revolving door, launching an exodus of your best employees. Plus, if word of dodgy pay and benefits practices leaks out, you might find it harder to attract the new workers you need.

Source: Respect: Delivering Results by Giving Employees What They Really Want(Jossey-Bass, 2011)

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