Many of our clients are determining their budgets during the last quarter of the year. We have noticed two predominate types of compensation budget planning during the past 12-18 months with our clients, those who have remained competitive with local and regional pay inflation rates and the organizations that decided not to increase employee pay for two to three years and now they’re competitively behind and they are losing employees due to less than competitive wages.
Some organizations have held true to their compensation philosophy of maintaining a competitive employee program even during the 2008 to 2011 recession. They continued to give merit pay adjustments or COLA’s of a lesser value than pre-recession percentages during these lean years. They did not want to lessen their ability to recruit and retain employees. Their compensation budget planning sessions were without compensation “catch-up” decisions or significant increases in compensation adjustments due to their steady approach with annual compensation inflation/adjustments.
We have listened to department heads state in compensation budget planning sessions that they have lost employees to other organizations where the pay differences are $5,000 to $10,000 more for a comparable position. The decision-makers for these public and private organizations are concerned about the 5% to 8% compensation adjustments required to return to competitive position within the market. Some of the decision makers would argue that they did not have the funds to give pay adjustments during the recession years though in some instances they made large allocations for capital infrastructure purchases. We supported the decisions for our clients that experienced a survival mode scenario or the public institutions with reduced budgets from a decline in sales tax revenue during the recession years.
In our compensation presentations based on market pay studies and our clients’ current pay positioning, we have encouraged our “steady as she goes” clients to continue efforts to maintain their competitive pay philosophy and for those who fell behind, it is time to “pay the piper” and makeup lost ground by budgeting pay adjustments that exceed market averages. We’re also realistic and know that our clients may not be able to return to complete competitive position for one to two years, but this decision will have an impact on attracting and retaining employees.
With average (mean) salary increase budgets below or close to 3% for the fourth consecutive year, managers may be tempted to skip differentiating employee performance altogether. But with such modest salary budgets, pay for performance should actually be more heavily underscored, according to World at Work Practice Leader Kerry Chou, CCP.
“In order to accomplish this, you need to effectively allocate available salary dollars, which could mean low or no raisers for marginal performers,” he said. “And while this isn’t a pleasant conversation for managers to have, in the long run it’s easier than losing your stars to the competition and then spending far greater sums to find replacements.
There is a “price to pay” to stay competitive with your employees’ pay and we recommend that our clients invest in retaining and growing the knowledge and capabilities of their workforces as opposed to the significant direct and indirect expense associated with high employee turnover.