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Despite uncertainty about where the U.S. economy is heading, recent salary surveys from compensation consulting firms reveal that salaries are expected to either increase slightly or hold steady versus 2019 salaries. In this issue of Compensation Alert, we look at how companies are planning to deal with 2020 salary budgets to remain competitive and retain top talent.

Survey information was gathered from human resource professionals facing an extremely tight labor market, increased investment in pay equity adjustments and climbing minimum wage rates. What’s more, many economists are predicting slower economic growth and greater risk for a possible recession within the next two years.

Under these conditions, participating organizations in this year’s salary surveys provide crucial insights into how companies are budgeting for salary increases in 2020.

WorldatWork

WorldatWork survey participants report that in 2019 salary budgets grew slightly to 3.2% average (median 3.0%) meeting last year’s projections. They expect salary budgets overall to increase to 3.3% in 2020. Specific pay increases are expected to be:

  • 3.2% for exempt salaried workers,
  • 3.3% for officers and executives,
  • 3.1% for nonexempt employees, and
  • 3.2% for nonexempt hourly.

In addition, pay equity continues to be a significant issue to organizations. The WorldatWork survey finds that 42% of participants plan to budget for pay equity increases in 2020, up from 37% in 2019. When pay equity adjustments are not budgeted, 46% of respondents report that company savings will be used for adjustments in 2020.

Promotional increases in 2020 are projected to average 8.9%, up slightly from 2019. The portion of salary increase budgets attributed to merit are projected at 3.0%. Not surprisingly, the largest increases in salary budgets are from the East Coast (Washington DC and Boston) and the West Coast (Denver, Portland, San Diego and San Jose). In 2019, the reported average salary structure increase was 2.2%.

Willis Towers Watson

According to the 2019 Willis Towers Watson General Industry Salary Budget Survey, salary increases are expected to hold steady in 2020. The survey reveals increases of:

  • 3.1% for exempt and non-management employees,
  • 3.1% for management employees,
  • 3.0% for nonexempt hourly workers,
  • 2.9% for nonexempt salaried employees, and
  • 3.1% for executives.

The survey finds that employers will continue to reward star performers larger increases than average performing employees. According to the survey, the highest performing employees were granted an average increase of 4.6% in 2019, about 70% higher than the 2.7% increase given to those receiving an average increase.

To retain your best workers, as compensation consultants we have long advanced a minimum increase for star performers should be at least two times the increase to average performers. Although the differential has crept up over the past few years, it still has not reached a minimum ideal level.

Mercer

Mercer’s findings are consistent with WorldatWork’s 2019-2020 Salary Budget Survey. While overall salary increases were 3.5% in 2019, they are projected to be 3.6% in 2020. Survey results show that merit increases for 2019 were at 2.9%, while mean and median merit increases are expected to be 3.0% for 2020.

Additionally, the Mercer survey found that there was no change in the number of employees receiving promotional increases in 2019. The average promotional increase was 9.3%, slightly more than the 8.9% increase recorded by WorldatWork.

Further findings reveal organizations continue to use performance ratings to differentiate salary increases, although a small portion do not use performance ratings (14%). Among this small group, the majority distribute merit pay based on manager discretion with oversight by business leader or HR/compensation.

The survey also finds that high performers received 1.6 times the salary increase of average performers.

Payfactors

The Payfactors salary survey provides detailed responses for U.S. and Canadian employers, with data broken out by industry, revenue, organization size, region and state.

According to the Payfactors survey, average salary increases in 2020 are expected to be:

  • 3.2% for exempt employees,
  • 3.2% for exempt (non-management) employees,
  • 3.2% for managers, and
  • 3.1% for officers and executives.

Industries reporting higher expected increases include professional services, pharmaceuticals, software, technology, metals, and oil and gas. Industries expecting lower increases include retail, not-for-profit, hotels and restaurants, banks and aerospace. The survey shows little difference in average increases by region.

Salary.com

According to its annual Salary.com Salary Budget Survey, median annual salary increases are expected to remain flat at 3.0% for 2020. The salary.com survey average salary increase is significantly lower than the salary increases predicted in prior cited surveys. Although different survey methodology may be present, also likely at play are different survey populations.

Variable Pay Programs Becoming More Important

After reviewing the results of these top-rated surveys, it is apparent that many organizations are struggling to remain competitive on salaries to attract and retain top talent. That’s why many are moving towards variable pay programs. Rather than investing in long-term, fixed salary programs, companies are focused on rewarding and retaining top talent via pay-for-performance incentive programs. Along with improving employee engagement and reducing turnover, another benefit to these programs is stronger market competitiveness.

How Do You Determine Your Salary Increase Budget?

Clearly, predicted market increase budgets are only one input to weigh when deciding on your salary increase budget for 2020. To begin with, it is important to distinguish between your competitiveness goal and your overall compensation strategy. Next, examine how far above or below that goal your current salaries are. Finally, evaluate how close your company can come to meeting your 2020 salary goal based on available funding.

One final point to consider: recessions are inevitable. Organizations that take strategic compensation and human resources actions in advance of these downturns will be better positioned when the economy turns around.

In Summary

Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss this topic further. In addition, you can read more on this topic at lappley.com. Please share this article with anyone who think may be interested.

How well do your employees know your company’s compensation strategy? Chances are that without a clear understanding of your organization’s pay program, your employees will not appreciate their value to the company.

In a 2018 Conference Board survey, it was reported that only 43% of employees were satisfied with their wages. Worse still, a low 27% were satisfied with their bonus plan. Clearly, better communication about compensation creates an opportunity to improve employee satisfaction, which drives employee retention, productivity and performance.

Because managers are responsible for communicating compensation details to the workers they supervise, much of employees’ understanding of an organization’s pay program rests with them. Not only do your frontline managers play an important role in leading pay discussions, they give context to compensation decisions and are key to promoting employee engagement.

According to Gallup’s 2015 State of the American Manager study, managers account for at least 70% of the variance in employee engagement scores across business units. Therefore, how well they communicate your company’s compensation program can mean the difference between better performance or a demoralized workforce.

Communicating Compensation: No Small Matter

Facilitating pay conversations between managers and employees is no easy task. First, they are busy. After all, they are the focal point of performance of their group.

Second, they are likely to shy away from tough conversations. This is doubly true for employees who are difficult to manage. Anxiety can lead managers to provide insufficient explanations, shift the blame to others, or avoid the conversations entirely.

In fact, a 2015 Harris poll found 69% of managers are uncomfortable communicating with employees at all. As a result, communications regarding compensation are often the last item on their agenda.

To boost managers’ confidence for effective compensation discussions with their employees, here are five things to consider:

Prepare a Compensation Strategy and Communication Plan

Arguably the most important aspect of communicating pay is the organization’s compensation philosophy and strategy. It explains why and how employees are compensated. Prepare a written compensation philosophy and comprehensive strategy, then give your communication strategy the same, thoughtful preparation.

Your communications strategy defines the approach your company will use to communicate with all communities. It should include clear objectives, well defined timeframes for achieving them, an implementation plan and a monitoring process to assess results and pinpoint improvement areas.

Define Your Core Messaging

Consistent, top-down communication about the compensation strategy is critical to promote affinity and avoid confusion. Make sure your messaging reflects the values and philosophy guiding your company vision and how your pay program rewards performance. Determine what information should be shared with your respective employee groups and when. Invest time and resources to get it right, starting by gaining buy-in from the executive team before rolling communications out to managers and finally employees.

Identify Channels for Communication

Who is your audience and what are their preferred methods of engagement? Identifying who your stakeholders are can help you determine which communities may have similar information needs and the best channels to reach them.

Face-to-face meetings provide opportunities for real-time interaction and feedback, while the company intranet or newsletter lets employees read at their own pace. Use a combination of channels to communication often. Consider the timing of key events and company milestones to demonstrate progress and showcase achievements.

Develop Communication Materials

Start with a statement detailing the elements of compensation and highlight how each element works, why it was chosen and how it links to the company’s overall business strategy. Describe how survey data was used to arrive at salary ranges and incentive plans. In addition, explain how merit increases were designed and add detailed descriptions of incentive programs, including measures used to calculate incentive payments.

Tables and bulleted lists present information in an easy-to-read format, as do charts and graphs illustrating the value of employee rewards and compensation. Concepts such as range penetration (the level of an individual salary compared to the total pay range) or compa-ratio (the relationship of base pay to market expressed as a percentage of the midpoint of the salary range) should be defined.

Some measures are more useful than others when calculating salary ranges within your organization’s job grade ranges. Typically, which measures to utilize depends on your organization’s pay philosophy and how competitive your industry’s pay structure may be.

Finally, a frequently asked questions document serves as a primary resource to address anticipated issues, matters of concern and items for clarification.

Develop a Feedback Loop

The evaluation of your communications program impact is a continuous process. Use confidential surveys, focus groups and interviews to gauge the impact of your communications and provide employees with meaningful opportunities to contribute ideas for improvement.

Training Managers on Effective Communication

If your managers feel ill prepared to have discussions with their employees about your compensation strategy, you can expect the uncertainty and negative consequences of poor communication to have a cascading effect.

Misunderstandings can occur when an employee is feeling they are not getting the information that they need. And when conversations get heated, managers must know how to recognize when the discussion has become counterproductive or frustrating to the employee.

Different people learn in different ways, so consider developing multiple options for managers to learn. For example, you may want to incorporate:

  • In-person, instructor-led training;
  • Interactive e-learning courses;
  • Video, particularly having senior management describe how the organization’s compensation programs support achieving corporate objectives; and
  • Webinars.

Having challenging conversations is part of being a good manager. When handled in the right way, managers can avoid the difficult situations that come with the territory. Remember to:

A. Practice, Practice, Practice – Prepare what you plan to say and consider what the employee is likely to currently understand. For instance, does he believe he is a high performer and that a salary increase or bonus is on the way? Is the employee likely to have an up-to-date understanding of the organization’s compensation philosophy and strategy?

B. Establish a Sense of Trust – Conversations regarding pay are easier if the manager is already comfortable talking to the employee in general.

C. Have Straightforward Conversations – Communicators are most effective when they avoid jargon and get right to the point.

D. Anticipate Reactions – Effective conversations do not end with managers communicating decisions and then walking away. Allow time for employee questions and choose a private place without interruptions. When an employee has a negative reaction to pay decisions, a follow-up meeting may be necessary to address the employee’s expressed concerns.

To be sure, your managers are one of your most important links to a successful compensation strategy. By educating your managers about your compensation strategy and training them to communicate it clearly, your employees will have a better understanding of their real value to your company. That effort will translate into a better return-on-investment in your strategic compensation program.

If you enjoyed this or other articles I have written, please share it with anyone you think may also find it of interest. For help or information on this topic, you can email me nlappley@lappley.com or call (847) 921-2812.

Pay equity is a topic that isn’t going away. Rather, the spotlight is only getting brighter.

This makes understanding possible pay gaps between the men and women in your workplace and adopting proactive approaches to remedy pay inequities more important than ever. For instance, according to the American Association of University Women, 42 states as well as Puerto Rico and Washington D.C. proposed new pay equity legislation last year. Not all the measures passed, but enough did making it challenging for organizations operating in multiple markets to address the issue of pay equity in a comprehensive way.

A growing number of states and local governments have made it illegal for employers to ask candidates for their salary history. The rationale for the law is this: since females have historically been paid less than males, platforming a new salary over a low salary only perpetuates the difference. In response to this trend, a recent WorldatWork survey finds that 37% of companies have a nationwide ban on asking potential candidates about their past pay.

Additional legislative approaches to tackling pay equity include new laws promoting more pay transparency; others give employers protections for making “reasonable progress” toward pay equity. Clearly, the shifting landscape and impact of gender wage gap laws raise compliance and performance concerns for companies and their compensation policies.

What is Gender Pay Equity?

When we talk about gender pay equity, this often is confused with equal pay or these terms are treated interchangeably. However, there is a difference.

The gender pay gap is a broad measure between the aggregate pay for women and men across the organization. It is expressed as a percentage of men’s earnings.

Equal pay requires women and men doing the same or a substantially similar job to receive the same compensation and benefits. In other words, equal pay for equal work.

It is important for businesses to understand the distinction. Why? Both areas should be examined to better understand pay differentials within your organization and the factors at play impacting your talent management programs.

Understanding Gender Pay Equity

Several studies in recent years have looked at pay gaps to better understand the causes and impacts.

In a new article, “More Than a Pay Gap,” management consulting firm Korn Ferry examined its compensation data base for organization-wide pay differences within 110 countries. What they found is that the gap in the United States narrows considerably the more specific the comparison becomes. While women on average earn almost 18% less than men, the gap between a man and woman working in the same job level for the same organization in the same function is typically only .9%.

Korn Ferry researchers have concluded the reason women are paid less than men is not necessarily the result of unfair pay practices. Indeed, this may be the case in some organizations (after all, averages mask actual comparisons). Rather, the gap in pay is deduced to be the result of fewer women working in higher paying industries or leadership functions.

As the Korn Ferry study reveals, the solution to the organization-wide gender pay gap represents a complex and systematic challenge. We will focus on how to meet the challenge in a future issue of Compensation Alert. Meanwhile, companies have immediate opportunities to evaluate whether your organization is complying with equal pay statutes.

Conducting a Pay Equity Analysis

Inequitable pay practices can pose immediate risks to your business – including reputational risk. To help uncover possible issues driving any pay differentials within your organization, conducting a pay equity analysis is recommended. Following is a step-by-step process overview:

It may be prudent to consult with a lawyer, as audits of this type are often protected by lawyer-client privilege.

  • Identify the equal pay practices you want to investigate.
  • Gather data on employees grouped by comparable worth. Jobs should be examined regardless of job title, with the focus on work performed, the manner in which the work is performed, and the skills required for the job.
  • Determine what drives pay most, whether desirable factors such as performance and/or level or undesirable factors such as race, gender or age are involved.
  • Beyond the job-based analysis, the study should look function-by-function, manager-by-manager, and location-by-location to see if any equity trends emerge. Any pay gaps can then be closed.
  • Following the job-based analysis, it is important to dig into the causes of those gaps. For instance, salary structure and other compensation tools need examining.
  • Finally, leaders must be committed to change if undesirable factors influencing pay have been discovered. Change can only happen if commitment exists at all levels to ensure fairness, consistent communications, and organization-wide management practices.

Conclusion

The type of pay analysis described above will need to use comprehensive compensation market data, review and likely overhaul compensation administration guidelines, and update job grading systems. But smart organizations can turn it into an advantage. How? By looking beyond current law to build proactive policies and practices promoting gender equality (and diversity of employees) and embedding these values into the company culture.

Further, experts say that organizations that manage pay equity well and have diverse, inclusive cultures post higher returns and have more trust in leadership, greater employee engagement, and less turnover. Organizations that fail to manage pay equity well are subject to the inverse consequences, plus increased risk of litigation.

Let’s Connect

If you enjoyed this or other articles I have written, please share it with anyone you think may also find it of interest. For help or information on this topic, you can email me or call.

Contact me at (847) 921-2812 or nlappley@lappley.com.

March 2019

In our November Compensation Alert, we argued that compensation transparency leads to greater employee engagement. When done correctly—with a well-defined plan and communications approach—compensation transparency becomes a powerful tool for attracting and retaining top talent.

Although there is widespread agreement on the benefits of pay transparency in the workplace, what is not always understood is the best way to implement it or just how transparent companies should be. This newsletter looks at the pros and cons for pay transparency and offers recommendations to find the approach that’s right for your company.

Opinions on Pay Vary

In the 4th Quarter 2018 WorldatWork Journal, compensation researchers Dow Scott and Devin Jordan reported on a new Pay Transparency Survey using participants’ data collected by Amazon. The study examined how employees perceive their employer’s pay communications and levels of pay transparency and sought to answer whether increased understanding of an employer’s pay structure and policies is related to retention, trust in management, and pay satisfaction.

Although the survey shared differing views on some salary issues based on age, gender and other factors, it revealed the amount of pay information is positively related to perceptions of satisfaction and trust in management and negatively related to employee intentions to quit.

Overall, respondents believe their companies communicate on most aspects of pay. Over 75% of respondents say their employers communicate pay policies and procedures and agree that questions to their employers about how their pay is determined are answered. A lesser number of survey participants (less than 50%) say they are communicated to about merit increases and changes in salary ranges.

Additional survey findings give us a better picture:

  • Culture: Interestingly, 38% of employees believe their organizations pride themselves on being transparent about pay while an equal number disagree. Half of respondents believe there are strong organizational customs about not discussing pay. But only 18% think they will be disciplined or fired for sharing pay information.
  • Privacy: 46% of employees believe that information about base pay or salary rate should be kept secret. Just over half believe that other employees should not know how an employee is paid. Younger employees, as expected, are less concerned about sharing pay information than older employees.
  • Info Sources: The HR department (57%) and managers (60%) are the primary sources of pay information, respondents said. Just 34% get their pay information from other employees, 32% from web sites. It’s worth noting that employees still rely on management as their primary compensation information source despite so much salary information now widely available on the internet.

It’s no secret that compensation can be a challenging topic in the workplace. For this reason, determining the amount and type of information to be shared has always been problematic to employers.

More pay transparency often contributes to employees’ sense of fairness, especially when they believe how they are treated is the same as others in similar roles. Knowing pay ranges upfront can also align employee expectations about what they can do to achieve strategic goals. For ambitious employees, having a clear career path in the organization encourages them to pursue growth opportunities that also contribute to company growth.

However, explaining the justification between salary levels requires thoughtful communication and an open dialogue about pay. If handled poorly misunderstandings can arise. It’s also important to remember that if too much individualized salary information is shared, star employees may be more vulnerable to being hired away by competitors.

Walking the Pay Transparency Line

With these pros and cons in mind, we advise employers to land on the side of increased compensation transparency, but with the caveat strategic communication must also become a top priority. Consider the following:

  • Start by surveying your organization to learn what employees’ communication preferences are. Although communication style or frequency may not be the same for all employees, pay transparency is important to all.
  • Keep individual pay information private. Communicate pay philosophy, compensation strategy, and pay structure, including salary ranges, merit increases, and incentives for every position in each job family. That way employees who may want to learn new skills or try for a new position at a higher pay level know where their aspirations will take them. Explain how, when, and why the organization makes rewards decisions and plan to communicate these points regularly. Show how compensation supports the goals and strategies of your organization.
  • Train managers in the details of your organization’s compensation program and give them the tools to communicate benefits and opportunities to employees.
  • Because women in the Pay Transparency Survey said they are not receiving as much information about pay as men, take additional steps to close this gap.
  • Provide a total rewards statement annually. This gives employees a full sense of all benefits they enjoy on behalf of your company.

We recognize that how your company approaches pay transparency needs to be as individual as you are. The key is to commit to more pay transparency and to evolve your plan as organizational needs change. In the end, your employees and company will be better off.

Contact Us

Please contact me if you would like to discuss compensation transparency, why it is important and how to go about it. Also, feel free to pass this newsletter on to any interested parties. I can be reached at nlappley@lappley.com or (847) 921-2812.

With unemployment at low levels and the economy continuing to expand, the need for compensation transparency is at an all-time high. Increasingly, employees are also making more demands for visibility into their rewards programs. If your employees aren’t asking directly for this transparency, they are likely seeking information elsewhere from peers, for example, or through websites offering compensation data.

The key to transparency is communication from the management team. However, managers at most organizations admit they struggle with how to explain the factors driving the company’s compensation decisions.

Employee Pay Perceptions

When employees believe they are paid fairly and equitably, they are more likely to stay with their current jobs and be more engaged in their work. However, a 2015 survey by compensation research firm PayScale shows there is often a wide gap between perceptions about pay and reality.

The survey of 71,000 employees found that most employees don’t understand how their compensation is determined or know if they’re paid fairly:

 

The survey results are clear: if compensation practices are not communicated, employees will not perceive the situation correctly or give the employer the benefit of the doubt.

Minding the Generation Gap

Laying the groundwork for a sound compensation communications plan begins with openness about how raises, incentives and promotions are handled. But changing workforce demographics may mean varying your communications approach and channels based on generational preferences:

  • Baby Boomers (Born: 1946-1964) – They tend to be longer-tenured employees with an attitude of loyalty and a strong work ethic. Boomers are used to pay discussions being private.
  • GenX (Born 1965-1979) – Having viewed the decline of employer commitment first-hand, they tend to be pessimistic about the workplace. They are conflicted in terms of openness to pay discussions. They’re willing to talk about the rationale of compensation, but less willing to talk about pay specifically.
  • Millennials (Born 1980-1995) – They are open with communication and are used to sharing information, believing there is little taboo in talking about pay. They tend to want fairness and career flexibility at work.
  • GenZ (Born 1996-Present) – Just entering the workforce, GenZ is comfortable with technology making it easier to communicate with them. However, we’re seeing the pendulum swinging back from the openness of millennials.

Millennials are now the largest group of employees. They are more open to compensation communications. This can be a problem for the other generation groups. But it is ultimately a good thing for everyone to be more open about pay as it will lead to greater trust which, in turn, will lead to higher engagement levels.

Consider Other Differentiators

There are other ways to think about grouping your workforce outside of thinking about generational differences. For instance, engineering employees may be less open about discussing pay, while sales teams may be more open. Or think of it in terms of job levels: entry-level employees may be very comfortable talking about compensation while senior managers may be less interested. Differences in how your employees prefer to get their information and the channels they are open to also influence your compensation communication strategy.

Are Your Managers Ready to Talk About Compensation?

According to PayScale, only about 19% of workers at organizations feel confident in their managers’ ability to talk about compensation. At the same time, managers are unlikely to recognize when an employee is feeling underappreciated. If an open dialogue is not developed and maintained, your company is more likely to experience loss of engagement, lower productivity and turnover.

We will return to the topic of compensation communication in our next Compensation Alert and look at how managers can improve their communications about pay to promote greater understanding of workplace compensation policies and practices. In the meantime, feel free to contact me about pay issues you are facing. I can be reached at nlappley@lappley.com or (847) 921-2812.

Last June in our Compensation Alert, we discussed how to develop a compensation strategy. As year-end compensation planning approaches for many companies, we think this topic is timely and worth revisiting with updates to address current trends.

Compensation strategy is part of a company’s human resource strategy and should be integrated with all other elements of human resource planning. A compensation strategy—a formal, written statement capturing the organization’s views and approach to compensation—serves as a guide and touchstone when designing new HR programs or evaluating existing ones. In addition, a clear compensation strategy lays a foundation for communication transparency when giving employees the rationale behind pay and benefit decisions.

Compensation Strategy Planning Elements

Like every strategy guiding your business, your compensation strategy should align with your business priorities.

Here are six elements to guide you through the design process:

  1. Gather Information: Obtain information and perspectives from your stakeholders, including directors, executives, managers, employees and customers. Take a close look at external and internal factors having a direct and indirect impact on your pay strategy. External factors include trends in supply and demand for talent, your relationships with your customers and challenges you are having in the current marketplace. Internal factors include your company’s business culture, values and strategic initiatives, as well as the core competencies of your current and future employees.
  2. Business Lifecycle: Consider your organization’s business strategy and human resource strategy, as well as where your business may be in its lifecycle.
    • Inception Phase – At this stage cash is tight and organizational structures and systems are informal.
    • Growth Phase – Here cash is tied up in growth; often developing the HR infrastructure becomes critical during this stage.
    • Maturity Phase – Mature organizations have cash and organizational structures are in place.
  3. Consider Demographics: Early career employees may need different incentives than those further along in their work lives. For instance, entry level employees may be willing to accept lower base wages in exchange for larger cash incentives or professional development opportunities. Employees nearing retirement may be willing to trade some amount of pay for greater medical and retirement benefits.
  4. Benchmarking: Gather information on salaries and wages so you understand how your organization stacks up against competitors and where your pay is relative to market rates. This approach involves understanding an organization’s relative positioning, but not necessarily blindly following. It also considers the economics of the business, so you can decide what’s best for the organization.
  5. Test Initial Strategy: Develop an initial strategy statement, then share it for feedback from stakeholders. When evaluating your compensation strategy, make sure it is equitable, fair, fiscally sound, legally compliant and provides a framework to effectively communicate with employees.
  6. Revise as Needed: Once you have implemented your compensation strategy, monitor and evaluate its internal impact – pros and cons – making changes as warranted. In addition, adapt your strategy to changes in the external business environment while keeping its intrinsic value.

How Competitive Do You Need to Be?

Understanding competitiveness begins by defining the markets where your organization competes for talent and business. Does your company recruit talent on a local, regional, national or global basis? Gather relevant salary data so that you can adjust your compensation strategy based on geographic differences in pay. Some industries, occupations and job levels, too, may be more competitive than others.

Establishing a market competitiveness target is a key element of an organization’s compensation strategy. Does your company plan to pay at, above or below market for the jobs in your portfolio? Based on your analysis, you’ll need to decide if you want to lead, lag or match the market.

For example, if you are currently paying below market median, your reputation is solid, business is good, or talent is plentiful, you may want to continue that approach. But if you currently have great employees and recruit only the best, need skills in short supply, are in a less desirable geography or the cost of living is high, you may want to target above the market median. These and other considerations must be weighed when developing your salary structure.

What Should be Rewarded?

Your compensation strategy should be tailored to meet your organization’s unique needs and circumstances. Most compensation strategies include:

  • Base salary has an important role in compensating employees as it establishes ongoing job worth and reflects employee performance. When deciding how wide to make salary ranges, make sure there is a clear purpose for each segment in the range. Also consider how you expect employees to move through the salary range as they advance in the organization.
  • Annual incentives are meant to reward annual performance. Once you determine who will participate in the incentive program and what the incentive opportunity will be, set performance measures and a feedback schedule so everyone is on track. Include financial and performance measures for both the operating company and supporting business units.
  • Long-term incentives, in contrast, are meant to reward a longer performance cycle and typically are part of an executive compensation program. The timeframe for these incentives is typically two-to-five years. Reward systems establish forward-looking performance conditions and include cash and equity.

What motivates employees can differ greatly, so use a mix of rewards.

In Summary

How your company spends its compensation dollars – often an employer’s largest expense – deserves a strategic plan aligned with business goals. In today’s rapidly changing employment environment, it’s time to leverage the most important asset your organization has: its people.

Contact Us

Please contact me at nlappley@lapppley.com or (847) 864-8979 to discuss any comments or questions you may have about how to develop a compensation strategy. Feel free to forward this email to anyone else who may be interested.

For the first time in four years, the national U.S. salary budget increase average is higher than 3%, nudging up slightly to 3.1% for 2018. This also is the first time when the actual salary increase has met the previous year’s projection. Further, U.S. salary budgets are projected to reach 3.2% in 2019.

Capturing information from 19 countries and 5,499 survey submissions, the annual survey of rewards professionals by WorldatWork finds that variable pay programs, such as performance-based bonuses and other incentive plans, remain the most popular in the U.S.

The chart below shows actual and projected salary budget information for the U.S. broken down by employment category.

Why Aren’t Salaries Rising?

So, with a national unemployment rate of 3.9%, new higher minimum wages in many municipalities, federal tax cut stimulus and rising corporate profits, why haven’t we seen more robust wage growth? Hiring gains have been steady with an unprecedented run of 94 straight months. In fact, the U.S. labor market added 157,000 new jobs in July. May and June employment gains were revised upwards to 213,000 and 248,000, respectively. May’s 3.8% unemployment rate was the lowest since 2000.

Yet, average earnings rose only 2.7% on a year-over-year basis.

There appears to be no easy answer to why salaries haven’t tracked with inflation. Rather, it appears to be a combination of factors hindering employers’ willingness to fund larger increases. We note, however, that from past experience employers typically take one to two years to adapt to upswings in the inflation rate.

Two Markets that Are Heating Up

Counter to overall salary trends, wages are rising rapidly in the recovering retail sector, however. Low unemployment has made hiring difficult in this segment of the economy, boosting wages. According to data gathered by job website Glassdoor, retail cashiers’ wages in July grew by 5.4% to $28,145 from a year earlier. Consulting firm Korn Ferry, in a separate study, found nearly one-third of retail corporate executives received at least 100% of their targeted bonus, more than double the 15% reported during the same period last year.

In some areas of the country, such as Wisconsin, wage growth is outpacing national trends. In May, for example, the average private sector wage in Wisconsin increased 6.4% over the same period in 2017, according to the U.S. Bureau of Labor Statistics. In comparison, the country’s wage change was 3.1% for the same timeframe.

Wages gains apparently are not a one-month phenomena, either. Wisconsin averaged a year-over-year increase of 5.7% in the first five months of 2018, compared to 2.7% for the U.S. The region also averaged an increase of 4.1% for both 2016 and 2017, outpacing U.S. wage growth both years.

What’s Ahead

In the increasingly tight labor market, employers must closely monitor labor markets to remain competitive and deploy cost-effective reward strategies that effectively attract and engage talent. We encourage employers to review their compensation strategy statement for their competitive pay target, then determine if they are tracking at the targeted level of competitiveness.

Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss further. Also, feel free to share this article with anyone who might be interested.

Late last year, Congress passed and President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The sweeping tax reform law reduces the marginal corporate tax rate at the federal level from 35 percent to 21 percent. This and other changes to tax law are boosting profits and will save businesses billions in taxes this year. So, how are they spending all that money?

Most companies are reinvesting their tax savings in strategic ways that drive business performance. So far, shareholders are reaping the greatest rewards, according to an analysis by investor Paul Tudor Jones’ Just Capital. Job creation is the second largest area for investment with 20 percent allocated. Jones’ nonprofit is tracking spending by companies in the Russell 1000; 133 companies have announced their intentions to date.

In addition, a recent Ernst & Young (EY) survey finds most employers are either planning to or have already made changes to enhance compensation through bonuses, salary increases and other pay benefits. Seventy three percent of companies surveyed expect to accelerate mergers and acquisitions.

Considering these and other trends, now is a good time to revisit your business compensation strategy to take advantage of opportunities that effect employee pay. Before making any long-term decisions, however, let your company’s business goals be your guide so that tax savings are invested where they will do the most good.

Making Tax Reform Pay

Tax cuts have contributed to growing optimism about the U.S. business outlook. And that optimism has translated into a strong economy.

Still, companies must be nimble to adapt to changes in the new tax law. Making the right strategic moves on where to invest tax savings requires thoughtful planning. Here are a few areas to consider:

1. Equal Pay – As more people keep a close eye on the pay gap, employers everywhere are working to eliminate wage discrimination based on sex, race, age, disability and other classes protected by federal laws. In this environment, they are evaluating how they can structure their compensation system so that it works for all employees. This means developing policies and compensation strategies that reward people performing well in the same jobs with similar work experiences, skills and education equally.

Yet, implementing changes means choosing a structure that pays internal employees fairly and is competitive externally. Consider using a portion of the tax break to identify any anomalies in your compensation structure. Then, develop solutions to pay disparity that can be implemented in phases over a reasonable time-period, as budget allows.

2. Shareholder Return – Shareholders who have invested in your organization expect a fair return. You can pass along tax savings to shareholders with an increase in dividends. This can take the form of a one-time payment or an increase in the quarterly rate. Another option: share buybacks.

3. Business Expansion – Companies who want to expand geographically, diversify product offerings or tap into new customers may choose to invest their tax savings in a merger or acquisition. With M&As, compensation programs must also be merged. Make sure your compensation strategy includes these important elements:

  • Competitive Pay Analysis – As the market for top talent gets tighter, attracting and retaining employees gets more challenging. This may be a good time to revisit the competitiveness goal defined in your organization’s overall compensation strategy. Consider using the tax reduction to fill in pay gaps. Look at national, regional and local market trends. Increases may be either to the entire organization or to select segments where compensation has increased faster than overall market wages.
  • Base Salary – The annual salary measures ongoing job worth and ongoing job performance. Under the TCJA, the performance-based compensation exception to executives $1 million pay cap has been eliminated. Now, compensation for the CEO, CFO and the three other highest paid executives is capped at $1 million regardless of whether compensation is performance-based or not.
  • Annual Incentives or Bonus Plans – These reward executives for reaching annual milestones or other incentivized, short-term financial goals. Cash is still the dominate incentive for private companies. Be sure to set goals for profitability or revenue growth as key performance measures. In January hundreds of companies announced employee bonuses resulting from the tax reform law. Although the pace of these announcements has slowed, more and more companies are following the national bonus pay trend.
  • Long-Term Incentives – This incentive rewards executives who create long-term value, a win-win for all when strategic objectives are met. You will also want to specify the length of the performance period, eligibility requirements, incentive opportunities, performance measures, and the payout or holdback schedule.

Whether your business is small and closely held or ranks in the Fortune 500, the new tax law will have wide-ranging implications for your compensation plans in 2018 and beyond. Please contact me at (847) 921-2812 or nlappley@lappley.com if you would like to discuss further. Also, feel free to share this article with anyone who might be interested.