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Is the Annual Pay Increase About to Become a Thing of the Past?

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Tania Stockbridge
on August 26, 2016

Every organization, regardless of size or industry, knows that you’re only as good as your best employees. Engagement and retention of this cohort is critical to success. Keeping your highest-performing and highest-potential employees engaged and happy is key to ensuring your employees continue to stay loyal and focused on driving your results for your company’s bottom line. There are a number of avenues to achieve that, but compensation is always going to play an important part.

Despite a growing economy and labor market, according to Mercer’s 2015/2016 US Compensation Planning Survey, the average salary increase budget is expected to be 2.9% in 2016, up slightly from the average increase budget of 2.8% in 2015.

The Wall Street Journal recently examined a trend among companies focused on eliminating the annual pay increase and replacing it with raises, bonuses, and other perks for high-performing employees only. The piece profiled companies like BetterWorks who doesn’t guarantee annual raises for its 100 employees and instead has their CEO review employee compensation monthly, adjusting pay as needed, as well as Novitex Enterprise Solutions Inc., a Stamford, Conn., company spun off from Pitney Bowes Inc. in 2013. Novitex told its employees to expect annual raises only if they deliver and since implementing that model, about 78% of the firm’s raise-eligible employees—42% of the firm’s total workforce of 8,000—have earned merit raises in the last two years.

At first glance the benefits to this model are quite apparent. You’re recognizing your best people in a real and tangible way that keeps them happy and feeling valued, while also weeding out your lower-performing crew as it becomes apparent to them where they stand when they don’t receive monetary recognition. The Wall Street Journal piece also makes the point that this model can also benefit corporations as a whole as things like variable pay, such as spot bonuses, which don’t permanently raise an employee’s salary gives companies more flexibility in down times.

We all know the idea of tying pay to performance is nothing new. It ties to other trends in compensation and performance that have been percolating for a few years, including also doing away with annual performance reviews and moving to a pay for performance model. Pay for performance and its benefits and implementation approach is something we’ve discussed frequently in pieces including The PeopleFluent Guide to Pay for Performance and Three Strategies to Overcome Your Biggest Obstacles in Pay for Performance.

The Wall Street Journal article highlights however, that there are some drawbacks, as individuals quoted from Mercer and the Cornell University’s Institute for Compensation Studies illustrate. Linda Barrington, executive director of Cornell University’s Institute for Compensation Studies states, “While a bonus might boost an employee’s pay more than a 3% raise would, workers may find it harder to grow earnings over time unless they win regular promotions.” Steve Gross, a senior partner at consultancy Mercer also adds, “Scrapping raises for the average performers who make up most of a company’s workforce could backfire. Only rewarding stars may antagonize the bulk of the people who get the work done every day.” This could mean that although you’re keeping the handful of rising stars, the majority of your employee base, who aren’t necessarily low performers, but not all-stars either, could experience increased turnover, lack of motivation and engagement, and resentment not only towards management, but to their fellow employees.   

Compensation is something that will always feel very personal and by nature, there’s a strong emotional element connected to it. This is why communicating the benefits of your compensation plan and philosophy is so crucial. It’s a topic we explore in our whitepaper Why is Compensation Communication Key to Retaining Great Talent? Your compensation management system should offer visibility so that you are able to make smarter talent investments in your people. Without a solution that is comprehensive, yet flexible, and that provides the ability to communicate context, being able to make strategic decisions around pay will be very difficult.

Reward communications also help employees understand their reward and how it’s tied to the value they bring to the organization, including tying the reward to business results. PeopleFluent manages all types of compensation including bonus, merit, commission, incentive, and executive compensation, within one system. Individual rewards data is displayed in detailed statements and in an employee’s Talent Profile. Making this process easy to navigate, and also easy to explain will go a long way in ensuring success.

PeopleFluent’s video coaching capabilities also help guide smart reward decisions, while alerts support corporate guidelines. Communication of total compensation is made easier and transparent to retain great talent. PeopleFluent is the only compensation software provider with embedded video and collaboration, streamlining your compensation communication and increasing the overall impact of your compensation methodologies.

The compensation plan and philosophy you choose is up to you. When that choice is made however, be sure you have the proper tools and functionality to support it. Learn more about why PeopleFluent’s Compensation Management solution was recently rated a Leader among all the vendors in the industry by renowned talent management firm IDC Research. Download the 2016 IDC Global MarketScape for Compensation Management today!

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