The annual salary increase should induce smiles and satisfaction. But often it does not. Faced with the typical 3 percent bump, employees frequently point to sites like Glassdoor that show higher pay for similar roles. Managers agonize over tight budgets. Yet, they acknowledge quietly that there are work-arounds; if a high-performing employee gets a rival job offer, they can potentially match it.
The result is a poor employee experience in which individuals feel they have to fight for a raise commensurate with their worth – and in which mostly only the “squeaky wheels get the grease.” It is a risky play for managers and the business, one that can easily backfire, and is of particular concern given the historically low unemployment rate in the US, and that 9 out of 10 executives expect stiffer competition for talent in upcoming years, according to Mercer research.
While employers have held on budgets for salary increases to current employees, they have begun to loosen their belts when it comes to external hires. Often, new hires are being brought in at a premium over their internal peers: 61 percent of employers say it’s easier to get approval for a salary offer for a new hire than to increase an incumbent’s pay. Concurrently, the voluntary quit rate in the US reached a 17-year high in July.
Meanwhile, current compensation systems are struggling from a decade of minimal investment. Mercer’s latest US Compensation Planning Survey revealed salary increase budgets for 2018 are flat at 2.8 percent and projected to be only 2.9 percent for 2019. Even an influx of cash from December’s Tax Cuts and Jobs Act hasn’t had an impact—only 4 percent of employers plan to redirect tax savings to salary increase budgets next year.
So what can be done to improve employees’ experience with pay raises?
1. Consider salary increase budgets as a strategic investment in the business. In today’s environment, every company has a unique mix of workforce needs that requires building or repurposing talent for the future. This calls for an investment in base pay that is different from competitors and that better reflects where the business is headed. It is a significant departure from current practice. Three-quarters of HR and managers today primarily consider the organization’s financial performance and market practices when deciding an organization’s salary increase budget.
Taking a strategic approach involves more flexibility and deliberation around establishing (and allocating) a compensation budget. Companies need to measure and assess gaps in their compensation programs not only at the aggregate level, but also at the individual employee level relative to market competitiveness and pay equity. Further, organizations need to align their compensation strategies to their talent and business strategies—that is, what functions might require further investment in people to fuel growth? The result is that some functions may require more and some may require less investment in compensation.
The challenge is often getting the CFO on board with a salary budget of more than the overall market movement. But why not consider giving more weight to the salary increase budget, given the high costs of turnover, of onboarding new hires, and of lost intellectual property that follows employees out the door?
2. It is a good time to redefine “merit” pay. Many organizations today define the annual compensation increase as “merit” pay to reward performance. However, tight budgets leave little room for any objective other than keeping up with inflation, making meaningful differentiation difficult if not impossible. With compensation budgets as constrained as they are, real base pay growth may only be achievable through career growth. Organizations that focus on career progression not only as a means to professional advancement, but also as a means to rewarding performance have an opportunity to make a greater impact with limited resources.
When career growth is achieved, it should be rewarded. Mercer research shows that employees received average promotional increases of 7.8 percent in 2018, up from 7.5 percent in 2017. To keep pace with the external labor market, organizations may need to let the pay level of the new role be the guide and provide more aggressive promotional increases – as the difference in the external market from one career level to the next is frequently as much as 20 percent to 25 percent.
3. Have open and honest conversations about pay. More transparent conversations around how pay decisions are made and an employee’s future earnings potential with the company are central to improving the employee experience. Many employees describe their employer’s compensation system as a “black box”; only 38 percent of companies train managers in the organization’s reward philosophy. In the absence of good information, managers delivering the news will often throw up their hands and blame HR and Finance for limited budgets.
Managers need more information to share with an employee about how their pay packet stacks up to market rates, and the rationale driving pay decisions. Research from PayScale shows that an employee’s perception of pay has five times more impact on engagement than their actual pay level. As a result, the return on investment in additional compensation can go sideways quickly if not well communicated.
4. Pay isn’t the only way for organizations to invest in their workforce. Competitive compensation is important to get right, but employees are also looking for more—everything from flexible working to career growth opportunities to purposeful work. Once there is a competitive foundation of compensation, these experiential and emotional rewards programs often show greater impact on outcomes such as engagement, commitment, and retention.
Consider expanding the view of rewards to include elements that differentiate the employee experience in a way that other employers will be hard pressed to replicate. Employers today are delivering more and more rewards that go beyond the “four walls” of the office, such as on-demand childcare, concierge services, and personal financial assistance and coaching. Ultimately, these rewards not only enrich employees’ lives, they also allow them to focus and be more engaged at work.
Rethinking the Pay Experience
Employee patience with the current state of pay is being tested. As the economy improves, they have more options for where to work and competitors are willing to pay them a premium to move. Embracing a new model enables employers to leverage one of their greatest assets—their people—to compete in the future of work.