Employee Engagement, Retention and Pay (Part 2)
By James T. Stodd, SPHR, SHRM-SCP
July 27, 2015
Just a few days ago the WorldAtWork (formerly the American Compensation Association) released a preliminary version of its 2015-2016 Salary Budget Survey.1 This survey shows that during 2015 most employees in the US workforce received pay increases that averaged 3.0{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7}, regardless of occupational class or level within the organization. It also projects that they will receive similar increases during 2016. As such, the trends noted in Part 1 of this message continue, as well as the likelihood that employers will experience the same challenges in attracting, retaining and engaging talent.
To get a better “feel” for the circumstance, let’s look at the impact on the typical worker. According to the most recent government report,2 the median salary for a US worker is $801 per week, or $41,652 per year. Assuming the typical 3.0{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} pay increase forecasted by the WorldAtWork survey, that person will make an additional $24.03/week. When adjusted for the anticipated increase in the cost of living (projected to be approximately 1.0{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} over the course of 20153), that increase will be reduced to a “real” increase of only $16.02/week, before taxes.
The circumstance may not be a lot better for top performers. For instance, let’s assume fully engaged folks receive a 5.0{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} increase (which is pretty typical these days for top performers). In that case, the employee would receive a raise of $40.05/week that when adjusted for inflation would realize a net increase of $32.04/week, again before taxes. That again is not great, especially when increases in the cost-of-living have averaged 2.1{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} over the last ten years, not the 1.0{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} projected for 2015.
Truly, if we were talking about our 401(k) plans, most of us would see a yield of this magnitude to be a very poor investment. Yet, that’s the return most employees will realize for the investment of their time and talents. And we wonder “why” so few are fully engaged, and “why” others may be so easily inclined to look for new opportunities elsewhere.
To successfully address the problem, we must realize a couple of important things. First of all, salary budget surveys, like the WorldAtWork survey, become self-fulfilling prophesies. Employers that step out-of-bounds with the projections run the risk of inflating their salary costs (and the cost of operations) above those of their competitors. Secondly, we must accept that the base salaries employers pay are largely compensation for an employee committing their time and energy to their current employer, and not someone else. After all, that’s what a salary really is…payment for our time…not performance, results or outcomes. And, if given a better deal somewhere else, many employees will have a substantial economic incentive to take the opportunity unless their employer does something different.
So what is to be done? Here are a few suggestions a proactive employer might consider:
1. Focus on Retention: a. Market Leadership Strategy: Consider adjusting your competitive strategy toward being the “employer of choice” within your market. It may cost some money up front (or over a series of a few years) to establish that leadership position, but once attained it may be considerably easier to maintain, and well worth the cost. b. Reward Top Performers: If option “a” is not workable, then employers should at least make sure their top performers realize some real economic gain. One way of doing that, without putting “fixed” salary expenses above the competition, is to supplement competitive salary increases with year-end bonuses granted to top performers, growers, and those demonstrating a high level of engagement. For instance, an employer may limit regular pay increases to a maximum of 5{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7}, yet give top performers a supplemental bonus equal to another 2, 3, or 4{56cd7e6aa1a9e8b37b474966a37e40db52ca317c7a8b7c79ab3d6ff71decf1c7} that must be earned each year. c. Performance-Salary Management Matrix: These tools shift the paradigm from a “percent increase” mindset to “current value” mindset. To make that happen, both performance ratings and current salary are used to determine merit increases. High performers who are paid relatively low then receive much greater percentage increases than those with comparable performance but higher pay, or those whose performance is of a lesser quality. d. Longevity Programs: Employers tend to use “merit” increases, applied and compounded yearover-year, as the primary if not sole reward for longevity and loyalty. Other than vacation and retirement plans, we rarely see “participation” in other pay or benefits plans conditioned upon service. I see no reason why employers can’t use “length of service” as a criterion for participation in variable plans, benefits or other reward programs. And, doing so makes sense if you want to retain loyal employees who have demonstrated long-term value and career growth potential.
2. Reward Contributions and Accomplishment: a. Variable Compensation Plans: As noted above, base salaries largely reward people for their time and commitment. A good strategy for rewarding performance, as well as differentiating one’s self as an employer, is to supplement base pay with meaningful variable compensation plans. These outcomes-focused programs, formalized or informal, come in various forms and shapes, and are limited only by the level of creativity applied to reward management. And, if appropriately designed these programs do not add to “fixed cost”, but provide rewards only if both the company and the participating employees do well. Finally, such programs can be easily modified for changes in strategic direction or business conditions. b. Multi-dimensional Compensation Strategy: Perhaps one of the reasons we seem to be facing the attraction-retention-engagement challenge is that we place too great a burden on our normal base salary and performance management programs. Many employers are finding an extended range of financial reward programs to serve them, and their employees, much better.
1 WorldatWork, Top Level Results: 2015-2016 Salary Budget Survey, http://www.worldatwork.org/waw/adimLink?id=78897&utm_source=Website&utm_medium=Link&utm_term=All &utm_content=SalaryBudget&utm_campaign=CM_SBS_TOPRESULTS00-100
2 US Department of Labor; Bureau of Labor Statistics, Economic News Release, Usual Weekly Earnings Summary, July 21, 2015 http://www.bls.gov/news.release/wkyeng.nr0.htm
3 US Department of Labor; Bureau of Labor Statistics, Consumer Price Index-All Urban Consumers, Seasonally Adjusted, US City Average, All Items, July 22, 2015. http://data.bls.gov/timeseries/CUSR0000SA0?output_view=pct_1mth