Radford Compensation 101

Chapter 4: How to Change Pay

Managing Rewards Programs

 

 

As employees learn new skills and their value to the organization grows over time, an increase in pay should be expected from both parties. This may sound simple; however, a pay raise isn’t just tacking on an arbitrary value to existing pay. With the labor market constantly in flux, companies that find themselves ready are the ones regularly updating their salary range midpoints.

How Should We Change Pay Over Time?

Today, most salary increase action can be categorized as merit-based, promotions or an adjustment. Traditionally, many companies have used a step-increase program, where salary increases were able to be granted to everyone in equal amounts. But the downfall of this approach is that it doesn’t foster improved performance, especially in technology companies.

In technology firms, merit increases are commonly granted to reward individual employees based on their contributions. However, if the company adopts a pay-for-performance culture based on merit, it is very important to make it clear what superior performance looks like and distinguish awards sufficiently so that those few who perform the best actually receive pay increases that reflect it.

Beyond the change of an employee’s pay tied to their performance, we’ve also referenced promotions back in Chapter 2 as a way to increase employee rewards when they take on duties commensurate with higher levels of job responsibilities. Delivering promotions at the same time as merit increases allows for larger pay increases and greater impact.

A pay adjustment is the last type of salary increase. These pay adjustments are increases that exceed merit-based amounts and might be given to bring employee pay into alignment with fellow employees in the case of an internal equity adjustment, or in line with market data in the case of an external equity adjustment.

Merit

Reward for Performance

  • When professing a pay-for-performance culture, pay increase differentiation needs to be significant
Promotion

Increased Job Responsibility

  • Delivering promotions at the same time as merit increases allows for larger pay increases and greater impact
Adjustment

Bring into Alignment

  • Reflects changes in the internal or external market in ways that regular budgeted increases will not adequately fund
 

These forms of salary increase aim to instill fairness into the pay program and mitigate the chances of employees from looking elsewhere for higher salaries, thereby preventing the dreaded discussion of a counter-offer. The sum total of money spent on salary increases may be budgeted on an overall or aggregate basis or it may be budgeted in individual component pieces with separate budgets for merit increases, promotions and adjustments.


Survey Scenario - Historical Merit Budget Trends

For a great source of salary increase insights, look no further than the quarterly-published Radford Trends Report. Access to trends data is complimentary when you participate in one or more Radford Rewards Surveys and complete required supplemental survey submissions.

For illustrative purposes and to demonstrate volatility, the chart below shows merit budgets during the recession in the U.S. from 2008 to 2011. The blue line here shows that during that time frame, average merit increases have been around 3% or 3.5% in the U.S. The gold line shows the impact of pay freezes. While the undiluted average, or average of budget numbers from companies actually giving increases, is the figure most analysts quote when asking about market trends, the reality during the recession was that total money spent on pay increases dipped significantly. The diluted average, computed by taking zero increase figures into consideration, show that overall salary increase budgets fell to below 1.5% during the recession .

U.S. Merit Budget Average (2008 - 2011)

Source: Radford U.S. Trends Report

Over the last seven years, merit budgets have been relatively stable, hovering around 3.1% for undiluted and 3.0% for diluted, as mentioned in the Q4 2018 Radford Trends Report . The return from an unprecedented number of companies freezing salaries between 2008 and 2011 reveals that the undiluted and diluted figures are once again nearly the same. Moderate inflation, productivity improvements and consistent company growth permit companies to give increases to most or nearly all employees every year. While the typical salary increase budget in the U.S. has been hovering around 3% to 4% for a number of years, the budgets in China and India have been double or even triple those figures, given that their economies are growing and average salaries are increasing at much faster rates than in the U.S..

 


The Many Forms of Rewards

When you consider the expenses involved in compensating employees and how much extra is required to be a leader in the market, it should come as no surprise that designing pay programs with variable pay is critical to a company’s success. Not only is variable pay important to retain employees, but it also links them to the success of the business.

The most widely used form of rewards is direct compensation. Both cash and equity are the main vehicles used to deliver pay to employees and are the focus of compensation surveys. But indirect compensation, provided through benefits programs, is another significant way to help secure employee loyalty. Not only is benchmarking benefit costs an important process to perform, but government mandates vary by country and are important to consider when developing expansion plans or determining how to deliver pay.

In addition to the monetary benefits associated with work, the value of relational rewards should not be underestimated. Developing employee skills results in enhanced contribution to the company over time, and helps your people grow in their careers. Furthermore, interaction with your peers also provides social benefits and contributes to personal growth while increasing the human capital of a company. However hard it is to monetize this aspect of the labor equation, it is worth remembering when communicating the total rewards package to employees at your company.

Direct

Cash and Equity

  • Base pay (salary or hourly rate; allowances)
  • Short-term incentives (formal bonus, profit sharing)
  • Long-term incentives (options, restricted stock)

Indirect

Benefits and Programs

  • Health and welfare benefits
  • Government mandates (e.g., social security)

Relational

Interaction and Development

  • Social, personal growth, "human capital appreciation"

 


Chapter 4: How to Change Pay Summary

  • Pay raises are generally categorized based on merit, promotions or adjustments
  • Salary increases are used to instill fairness into pay programs and mitigate the chances of employees from looking elsewhere for higher salaries
  • Merit budget averages in the U.S. have been relatively stable during the last seven years around 3.1% undiluted and 3.0% diluted
  • During an economic downturn or recession, the diluted average should be taken to accurately portray how much salary increase budgets fall
  • Variable pay links employees to the success of the business and can be direct, indirect or relational
  • Relational rewards should not be underestimated and should be worth communicating as part of the total rewards package to the company

 

Go to Chapter 5

 

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