alary-increase budgets for 2008 are flat, with all of the major surveys reporting
projected increases averaging 3.8 percent for 2008, unchanged from 2007 and just
one-tenth of a point above 2006.
"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.
Click here to download this feature
Workforce Management, November 5, 2007, p. 44
-- Subscribe Now!
= Member Only
