Pay Incentives Planned as Retention Tools

June 21, 2010    

Original Article: Human Resources Executive Online

by:  Kristen B. Frasch

While employers aren’t yet raising compensation, the majority do plan to use variable and incentive pay to thwart an anticipated flight of top talent when better times have clearly arrived.

About two-thirds (65 percent) of 476 U.S. business leaders polled are considering or strongly considering pay increases to drive retention as the economy recovers, according to a survey from Marlborough, Mass.-based benefits and compensation consultant Workscape.

For the past three months for which data is available (February through April), there were more workers voluntarily leaving their jobs than being laid off, according to the U.S. Bureau of Labor Statistics.

And a recent survey by Nashville, Tenn.-based OI Partners found that nearly two-thirds (64 percent) of companies are concerned they may lose managers when the job market improves. Nearly half (48 percent) are concerned they will lose executives.

Of the pay incentives employers are considering, merit increases were most likely (66 percent) to be offered, followed by performance-based bonuses (52 percent), market/equity adjustments (24 percent) and lump-sum payments (12 percent), according to Workscape’s study, Managing Employees and Total Rewards during the Economic Upswing.

The study also found that nearly half (46 percent) of the companies will consider benefits increases this year. A slim margin (12 percent, down from about 25 percent last year) say they plan to cut benefits.

“Our results confirm that, when American firms are convinced the recovery has taken hold, they will take measures to prevent attrition,” Workscape’s report states.

The findings jibe with the latest findings from the Philadelphia-based Hay Group, showing planned merit increases in 2011 of 3 percent for executives, middle management and supervisory and clerical positions.

“While these increases are relatively low compared to increases over the past decade, they do reflect a sustained uptick” from a Hay Group survey conducted in March 2009, “when organizations indicated planned salary increases were at a low point of 2 percent for most employee groups — and 0 percent for executives,” says Tom McMullen, vice president of the firm’s North American reward practice in Chicago.

The renewed focus on variable pay and differentiated total rewards as incentives is for far more than avoiding post-recessionary flight, according to McMullen.

“While recruiting, engaging and retaining key talent are top-of-mind concerns,” he says, “organizations continue to look for ways to effectively balance this with managing the costs of rewards.

“As a result, we see many taking a renewed focus on differentiating their ‘total’ reward programs by offering clearer career paths, more meaningful work experiences, improved work climates, global mobility and targeted development in addition to increased monetary awards.

“Performance [not just retention] will be a key driver [of pay], and total rewards — which are more closely tied to performance — will play a crucial role in allowing organizations to compete in the new environment,” says McMullen.

“The contraction in the U.S. economy continues to cause U.S. businesses to exercise restraint in growing base salaries,” he adds. “A clear trend as organizations emerge from the recession is a shift in focus from fixed to variable pay.”

Salary-increase figures from another compensation consultant, Compdata Surveys, underscore that sense of restraint on the part of U.S. companies and cast darker shadows on the prospects of employers raising base salaries anytime soon.

Those newly released 2010 Compensation Data Services Survey results show pay-increase budgets at all service organizations combined continuing to decline this year, falling to 2.2 percent, down from 2.5 percent in 2009, with little change expected. A slight uptick, to 2.5 percent, is predicted in 2011.

“With a slow economic recovery expected, service organizations are continuing to make conservative compensation choices,” says Amy Kaminski, director of marketing for Compdata.

According to her survey, pay-increase budgets vary within the service industry, with accounting firms at the top with 3.3 percent. Engineering firms followed at 3 percent, with business services at 2.6 percent and technology and data-processing organizations at 2.2. Media companies had the lowest pay-increase budget, at 1.1 percent.

As for next year, Compdata figures show accounting firms projecting the highest pay-increase budget, at 4 percent, with media projecting the lowest, at 1.8 percent — still a far cry from average increases of the past decade.

“Although keeping current employees on staff is a top concern during the jobless recovery predicted by most economists,” says Kaminski, “increasing pay will continue to be a difficult priority until an upswing in the economic climate becomes more visible.”

Original Article: Human Resources Executive Online

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