Employers in India are abandoning the traditional practice of across-the-board annual raises to more targeted compensation strategies in which employees are increasingly expected to earn their raises through high performance or professional development, Saumya Bhattacharya reports at the Economic Times:
Last month, when Aon India Consulting announced the findings of its salary increase survey for 2017-18, average increment was estimated to be 9.4% for the year, almost the same as last year. From 2014 to 2018 (projections), average salary increment has declined from 10.4% to 9.4% — with the focus on performance becoming sharper each year. With the ability to learn new skills getting added to the high-performance matrix, the definition of top performers is also set to change.
Top performers, according to the new definition, would get an average salary increase of 15.4%, about 1.9 times that of an average performer, said the survey. … Experts say the phase of a large chunk of employees getting 14-15% increments is over. Ten years ago, you would have 20% of the organisation categorised as high performers. This has shrunk to 7.5% of the population in a company, they add.
The “Tax Cuts and Jobs Act” passed by the US Congress last month, which lowered taxes on corporate profits and most employees’ salaries, has a number of implications for employers, affecting payroll withholding as well as the tax treatment of executive pay and some employee benefits. One of the arguments the Trump administration and Congressional Republicans advanced for the tax cuts, which were historically unpopular among the American public, was that lowering the corporate tax rate would incentivize companies to use their tax savings to invest in their workforce, giving millions of employees a much-needed raise.
While several large employers announced plans to issue bonuses to employees, raise wages, or make other business investments after the tax reform bill was passed, most companies have indicated in earnings calls and surveys that they plan to parlay most of their tax cuts into debt repayment, dividends, and stock buybacks. Corporate America, Solutionomics founder Chris Macke argued in an op-ed at the Hill in December, was already sitting on large piles of cash and not prioritizing business investment due to insufficient demand. Companies, he wrote, need more customers more than they need more cash.
Whether or not US companies decide to invest more of their tax savings in growing their business (which they may still face public pressure to do), Bloomberg’s Rebecca Greenfield notes that these investments probably won’t come in the form of across-the-board raises. For most workers, the 3 percent annual raise, which has been standard for five years, will likely remain the norm in 2018:
Recent surveys of US organizations on their 2018 salary budgets show that more of them are moving toward an increasingly differentiated compensation strategy, with high performers getting rewarded with variable incentive pay and bonuses, while average and low performers receive smaller annual raises, or sometimes none at all. Employers like these more targeted pay schemes because research, including our work at CEB (now Gartner) shows that they tend to be more effective at motivating performance than routine raises for everyone.
The other reason for the increasing popularity of variable pay is that it gives employers more flexibility in their compensation budgets from year to year. It is practically impossible to take back across-the-board raises, or decline to give them when employees have come to expect them each year, without incurring a huge hit to employee morale. Variable raises and particularly bonuses tied to individual performance are more malleable: Giving an employee a substantial bonus for the great work they did this year this does not obligate you to give them that bonus again next year.
While beneficial to employers, and arguably good news for top performers, this change does have a downside for employees, making their incomes less predictable and leaving them more vulnerable to macroeconomic shifts. The other challenge here is that focusing raises exclusively on top performers can leave less room to differentiate rewards between average and low performers. As our own Brian Kropp tells NBC News’s Martha C. White, this carries its own set of risks for employee engagement:
The latest salary planning survey from Aon Hewitt finds that most US organizations plan to keep wages relatively flat for most employees in 2018, with base pay increases averaging 3 percent and spending on bonuses and other variable pay declining to 12.5 percent of salary budgets, the lowest since 2013.
“The economic outlook for most industries continues to improve with increased demand for goods and services and stronger job creation, but companies remain under pressure to increase productivity and minimize costs,” Ken Abosch, broad-based compensation leader at Aon, said in a press release. “As a result, we continue to see relatively flat salary increase budgets across employee groups, with most organizations continuing to tie the majority of their compensation budgets to pay incentives that reward for performance and business results.”
Two-thirds of organizations are increasing the differentiation of their merit pay in 2018, Aon finds. Among those employers, 40 percent are reducing or even eliminating raises for low performers, 18 percent are using a more highly leveraged merit increase grid, and 15 percent are setting more aggressive performance targets.
Surveys of salary budget projections for 2018 show that US employers are planning to hand out raises of 3 percent on average, similar to the previous few years. The latest survey from Willis Towers Watson concurs in this regard, Bloomberg’s Rebecca Greenfield reports, finding that 98 percent of employers plan to raise salaries this year, with most employees getting a raise of around 3 percent. However, WTW also found that top performers are getting a bit more than the rest:
Employers are cautious about giving raises, and even as some complain of trouble hiring as the job market tightens, few feel pressure to pay their employees more, said Sandra McLellan, a researcher at Willis Towers Watson. A sliver of employees will, however, see a bigger bump on their pay stubs this year. So-called star performers, those who score highest in performance ratings, can expect, on average, a 4.5 percent salary bump.
Lackluster wage growth remains a weak point in an otherwise strong US economy. Pointing to the latest salary budget survey from WorldatWork, Stephen Miller at SHRM notes that US employers’ budgets for salary increases are expected to grow by about 3 percent on average in 2018, “essentially unchanged from 2017”:
WorldatWork’s findings are in line with other 2018 salary projections. For example, 2018 pay projections were reported last May in Planning Global Compensation Budgets for 2018 by ERI Economic Research Institute, a compensation analytics firm in Irvine, Calif. The firm’s forecast, based on data from over 20,000 companies in its research database and analysis of government statistics, projected that U.S. salary increase budgets will grow by 3.2 percent in 2018, up from a 3.1 percent increase in 2017 and 3.0 percent in 2016.
In fact, salary increases have averaged around 3 percent a year over the past five years, amid low inflation and a reluctance on the part of companies to pass on the cost of higher pay to consumers. At the same time, many companies are rethinking the blanket annual raise as a rewards strategy, preferring to rely more on bonuses, targeted raises, and other incentives to reward high performers.
There is, however one area in which US businesses’ investment in their employees is increasing: namely, retirement savings. Martha White at NBC News highlights new data from Vanguard showing that employers are contributing considerably more to their employees’ 401(k) plans than they were just a few years ago, with the average contribution last year standing at 4.7 percent of employee pay, up nearly a full percentage point from 2015:
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At Talent Economy, Lauren Dixon discusses which broad indicators of economic health should influence organizations’ compensation choices:
Economic indicators help leaders get a sense of the health of the overall economy, but when it comes to setting compensation, experts say using these figures as a benchmark remains perilous. “A growing economy should drive down unemployment and support wage growth, which implies that a CEO should be vigilant about the need to compete for talent via compensation packages,” said Josh Wright, chief economist at iCIMS, an HR software company in Matawan, New Jersey. …
That isn’t to say executives shouldn’t follow certain indicators to pair with a more focused compensation analysis strategy. According to iCIMS’ Wright, the major macroeconomic indicators executives should look at when considering their companies’ compensation strategies include:
- Costs of living.
- Price pressures of consumers.
- Local housing markets.
- Consumer Price Index.
- Personal Consumption Expenditures.
This brings to mind the preliminary discussion taking place in some executive circles about eliminating regular, annual salary increases and tying individual increases specifically to clear step changes in employees’ skills that can be assessed. For businesses, the argument here is that we need to tie pay increases more clearly to worker outcomes instead of an abstract trigger like the CPI or trade agreements that may affect our workforce differently than others. That way, rising talent will get the raises they deserve, regardless of economic conditions.