Where Have All the Raises Gone?

Last month The New York Times ran an article bemoaning the loss of pay raises in favor of one-time bonuses and non-monetary rewards. Cited in the article, analyst firm Aon Hewitt calls this a “drastic shift” based on the firm’s annual survey on salaried employee compensation.

“The share of payroll budgets devoted to straight salary increases sank to a low of 1.8 percent in the depths of the recession. It dropped to 4.3 percent in 2001, from a high of 10 percent in 1981. It has rebounded modestly since the recession, but still only rose to 2.9 percent in 2014, the survey of 1,064 organizations found. (These figures are not adjusted for inflation.)

“Aon Hewitt did not even start tracking short-term rewards and bonuses — known as variable compensation — until 1988, when they accounted for an average of 3.9 percent of payrolls. Ten years later, that share had more than doubled to 8 percent. Last year, it hit a record 12.7 percent.”

The article goes on to point out, “Over the past 12 months, real average hourly earnings have increased by just 2.2 percent.”

After reading this article (and now sharing it with you), I have two questions.

Why are we surprised that average salary increases are at 2.2% on average?

Merit increase structures have been low for years with very little differentiation between the top performers and the average. Indeed, I’ve seen many stories about merit increase budgets being split such that top performers reach a 3% raise, average performers a 2% raise, and low performers a 1% raise (if any). Considering research reported in Psychology Today showed “a merit raise needs to be about 7 to 8 percent in order for workers to feel pleased about the raise and motivated to work a little harder,” our current approach to raises is a long way away from achieving the goals of our investment.

That’s why I’ve long advocated for consideration of a new approach. Give all employees annually an across the board Cost-of-Living Adjustment (COLA) of approximately 2%. (COLA for 2015 in the U.S. was 1.7%.) Then create a strategically designed social recognition program in which all employees are eligible to recognize and reward others and be recognized themselves – in real-time – when they’ve contributed to or achieved performance-based metrics.

This is only practical, however, if we redefine what we mean by performance based rewards, which leads me to my second question.

Should we start thinking about performance based rewards in a new light?

“Performance-based rewards” needs to mean something different than “results or outcomes only.” The definition of “performance” needs to include the behaviors demonstrated in achieving results, the ability to contribute well in the face of trying circumstances, and wisdom to extract valuable lessons from failure quickly. Doing so broadens dramatically the reasons for which employees can be rewarded throughout the year in sync with the efforts being recognized.

Many companies are already moving down this path. The Aon Hewitt research showed, “Ninety-one percent of the companies surveyed have at least one broad-based reward program, up from 78 percent in 2005 and 47 percent in 1991.”

The positive psychological impact of raise lasts but a very short time. The positive impact of appreciation and recognition, tied to appropriate, calibrated rewards, lasts much longer with the added benefit of directly reinforcing behaviors and actions you want to see again and again.

Instead of bemoaning the loss of meaning merit increases, perhaps it’s time to rethink how we allocate our Total Rewards budgets.

What else should be included in a new definition of “performance?” How should we best structure raises in the era of Total Rewards?

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. He is the co-author of "The Power of Thanks" and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[E. James (Jim) Brennan]

Derek reminds us again of the long pay increase weaknesses that have all but disabled the ability of base pay changes to reinforce desired behaviors. We keep warning about it here (http://www.compensationcafe.com/2015/02/make-me-whole.html) long before the surveys confirm our predictions, proving the value of following this group's prescient articles.

Note that 1.7% was the Social Security COLA based on the urban hourly wage CPI index, so it only reflects that market basket. Such tiny incremental changes complicate financial reinforcement planning over time. It obviously forces more attention on contingent rewards and broader consequence options than relying on compounded cash alone.

Interesting additional thought, that performance expectation emphasis may swing again, from output results back to process. Hope we don't return to the bad old days where attitudes are subjectively "evaluated." Keep in mind that as pendulums swing from time to time, each clock is set differently and hardly any two move in exact unison: variety will persevere even while gross trends shift.

[Trevor Norcross]

Hi Derek,
I don't think the trick is to abandon one pay component for another. For me, the trick is to create a full tool kit of components that complement each other. Each component has its strengths and weaknesses.

Recognition programs in themselves are no better than performance increases if not done right. I believe the 91% of companies with at least one recognition program relates to the use of anniversary awards which typically add little value.

In order for a car to drive optimally you need four wheels. For rewards to work you need to find the right balance for all reward components.

Thanks,

[Tony Bergmann-Porter]

Hi Derek.

Couldn't agree with you more.

http://www.compensationcafe.com/2014/11/possible-direction-for-21st-century-rewards.html

[Dan Walter]

There are so many factors at work in the flattening of wages.

1. Survey data. The more people adhere to survey data, the more it will repeat itself.

2. Difficulty in correctly surveying complex compensation, like equity grants. The extreme variability of these grants is seldom shown in data. Some companies use this as advantage that results in far larger payments than shown in data, Others use it as an excuse to keep pay low, since "market data" does not support the larger payments (and the company or its shareholders do not really like the use of equity compensation.)

3. Tight budgeting at publicly held companies. With shareholders grinding for every penny of EPS/TSR. Finance departments and CEOs have little motivation to have pay grow any faster (for anyone but executives)

4. A lack of business acumen on the part of many compensation professionals. With pay accounting for as much as 70% of revenue at small companies and seldom less than 40% at very large companies, compensation professionals effectively drive the single biggest budget line on the books, but seldom ensure they have a position at the real budget table. Much has been said and written about "getting a seat at the table". This must happen if any real change is to occur.

I can go on, but I must get my own post for tomorrow finished....