"When we talk to clients, the No. 1 issue is talent—talent acquisition, retention and development," says Steven E. Gross, global leader of Mercer's broad-based performance and rewards consulting business. "With this deep concern about talent, and with labor markets still relatively tight, we would expect to see larger increases in salary budgets. There is an obvious disconnect between the focus on talent and the budgets."
Overriding all the concern about talent retention is the fact that companies are still determined to hold down fixed costs. "For most companies, it's a zero-sum game," Gross says. "Budgets are not going to get bigger. You have to cut one group to raise another."
When companies set their salary budgets, they usually look at inflation for the current year and add one to two points, so this year's inflation rate drives next year's budget. "This is neither good nor bad," Gross says. "What is key is the distribution."
Best practices put salary increases for high performers at double the increase for average employees. "Double the average really sends the message," Gross says. "If you want to make a big statement, the people at the bottom will get nothing, and you can skinny down the middle to give greater rewards at the top."
Some companies are using off-cycle salary increases to boost pay for top performers without drawing attention to the large differential. "If, for example, the average increase for top performers at the annual review is 5.7 percent, the company can come back in at midyear with an additional 3 percent to 5 percent," Gross says. Companies can fund midyear increases by setting aside a portion of the annual salary-increase budget.
The distribution of incentive payouts should also show sharp differentiations. "Especially for the cadre of talent that is in great demand, incentive payouts should be double the average payout," Gross says. The latest Mercer survey, however, found a counterproductive increase in bonus payments for workers at the lower end of the performance scale.
"Historically, bonuses for the lowest group averaged 5 percent, but we are seeing 8 percent to 9 percent," Gross reports. "It makes no sense to give such high incentives to low performers. Companies still reward low performers because they don't want to have to hire replacements. But when you subsidize the bottom, you rob the middle and the top."
Weak performance management and the misplaced rewards that result usually stem from a lack of commitment to employee development at the top of the organization, according to Gross. "Middle managers take their cues from the top of the house," he says. "In addition, it's hard work to have those difficult conversations with low performers."
The real opportunity for both employers and employees lies in career development programs, with the associated promotional increases and higher incentive amounts. "All of the best companies are working on career development as one way to balance buying talent with building talent," Gross says.
Companies are also creating career development programs to take a more proactive approach to retaining talent and to pre-empt offers from competitors. Gross notes that counter offers have become much more common. "If an employee threatens to leave, there is a 50/50 chance that the employer will make a counter offer, and in some cases the company may be held hostage," he notes.
Workforce Management, November 5, 2007, p. 44 -- Subscribe Now!