Compensation in 2012 Will Be Looking Very Familiar

Average base-salary increases will be in the 3 percent range in 2012, like in 2011, analysts say.

November 18, 2011

American workers hoping for a decent raise after three years of meager wage hikes don't have much to look forward to for at least another year.

Average base salary increases appear to be stuck in the 3 percent range through 2012, according to several surveys of compensation practices at U.S. companies. That level of pay increase is in line with 2011 average raises but below the 4 percent standard before the recession undercut wage hikes in 2009.

"We were thinking that as the recovery came, some organizations would start doing catch-up, with 4 percent, 5 percent or even 6 percent increases. That clearly has not happened," says Kerry Chou, senior compensation practice leader in Scottsdale, Arizona, for WorldatWork, a not-for-profit organization that focuses on human resources issues. What's worse, inflation has started creeping up, eroding even the modest increases being doled out by U.S. companies. WorldatWork noted that for the 12-month period ending in April 2011, inflation rose faster than base pay for the first time since 1980.

Ken Abosch, compensation group leader for HR consultant Aon Hewitt, says there is no indication that base pay rates will start to catch up any time soon, particularly with the unsettled global economic picture. "If there is any good news for employees, it is not going to be on the base salary increase side of the equation," Abosch says. "But it could come in the form of a bonus opportunity."

Abosch says that despite the low level of base pay increases, the extra compensation that workers can earn from bonuses, merit awards and other variable compensation programs could still be substantial. But those increases are typically performance-based, with a select few employees seeing the biggest rewards.

One bright spot for workers is contained in a salary survey released in October by staffing specialist Robert Half International, which said that starting salaries should rise an average 3.4 percent in 2012, led by technology positions, which were projected to see a 4.5 percent jump in starting pay.

Extra incentives have become increasingly important in this era of low base-pay increases as companies seek creative methods to encourage high performance and deter defections to other companies. Those incentives cover a broad range of options, including merit pay for workers deemed top performers, profit-based schemes that tie bonus pay to a company's overall financial performance, and various types of rewards or incentives that range from help with college expenses to one-time freebies such as tickets to sporting events.

While consultants seem to agree that companies are continuing to make extensive use of variable pay schemes and reward programs, they differ on how fast those methods are growing and which ones companies deem most effective. That difference is reflected in how individual companies are addressing the compensation issue.

One place where diverse approaches are evident is Minnesota. Two large employers have taken dramatically different strategies toward compensation.

General Mills Inc. in Minneapolis has put just about every worker on a variable pay plan in which raises are tied to performance measures. As a result, pay increases can vary widely from employee to employee.

But the nearby Mayo Clinic in Rochester, it uses no variable pay system at all, instead opting to give uniform raises to every employee based on industry standards. Mayo sets its annual raises above the norm, then announces the percentage increases for job categories to the entire workforce. There are no variables and no secrets in terms of individual compensation increases.

To hear the two employers tell it, there seems to be little difference in effect. Both say their systems create loyal, productive employees and improve overall company performance. General Mills argues that the performance-based incentives drive productivity. Mayo says its standard scale for pay increases provides clarity and avoids the distraction of endless evaluations and monitoring that come with merit systems.

At General Mills, the central corporate campus in Minneapolis includes 3,000 workers, with another 2,500 in the area. The company employs 35,000 worldwide, about half of them in the U.S. The packaged foods giant tries to set its compensation level above industry standards, but uses a system of merit and bonus pay tied to performance that adjusts each worker's actual pay. Part of that system is based on corporate performance: If the company does well, workers can get paid more.

"Every single employee in our company has a variable element to their pay," says Mike Davis, senior vice president of global human resources. "We provide very good compensation and the ability to make a lot more for high performance. We think it makes a difference." Mayo, on the other hand, believes that such merit and bonus systems can create an unnecessary distraction that sows mistrust and erodes morale. They can also be a drain on supervisors, who often dread the task of computing raises and then telling workers individually how much each will receive. During a period of lower overall compensation increases, those variable pay schemes can mean very minor differences from worker to worker—sometimes just pennies an hour for lower-paid employees—but they still require the extensive work of evaluating performance and determining raises.

"It is a difficult job to try to make those tough decisions about pay," says Karmen Reid, director of compensation at the Mayo. "We at Mayo are a real team environment. Most of our managers say it would adversely affect the team environment if they had to deal with a merit pay system."

Reid says she has heard from some colleagues in other organizations who also have begun questioning the use of merit systems. But consultants say the overall trend seems to point toward more use of variable pay rather than less.

Tom McMullen, reward practice group leader at the Hay Group consultancy in Chicago, says variable pay systems, particularly those based on a corporation's overall performance, have continued to spread. "Back in the late '80s, the only people eligible for incentives were executives and midmanagement," he says. "We have seen the threshold of participation in annual incentive plans pushed lower and lower into organizations. Now a majority of lower-level folks are being included in those programs."

The design of annual performance incentives has changed somewhat, influenced by the recession, McMullen says. Prior to the recession, many of these programs based rewards on revenue and volume growth. The emphasis began to shift in 2009 and 2010 to profits, with new hurdles that limit or eliminate payouts unless certain profit targets are met. At the same time, companies are fine-tuning performance measures to focus more on rewards for key functions like customer service.

Karen Vujtech, managing director at Total Rewards Consulting in Schaumburg, Illinois, says one big difference these days is that corporate management is being more rigorous about enforcing variable pay schemes. One effect is to widen the gap between high and average performers.

"Although many organizations have talked about it for a long time, the reality is that companies are making tougher decisions now about who is going to get that 3 percent, and it may not be every employee," Vujtech says.

Still, the prospect of even a substandard increase would be an improvement for many workers, particularly at companies that struggled the most during the recession. Aon Hewitt's Abosch says more than 20 percent of companies that his firm surveys reduced compensation in 2009 during the depth of the recession. The effects lingered in 2010, when 13 percent froze pay. About 4 percent planned to freeze pay in 2011, while only 2 percent said they planned freezes in 2012.

Workforce Management, November 2011, pgs. 3-4 -- Subscribe Now!