As the dust clears on the recession, and the job market picks up, employers are re-examining their compensation and bonus pay structures.
While there were job gains in professional and business services and health care, the U.S. Bureau of Labor Statistics said that the national unemployment rate was little changed at 6.1% in August. But it is a far cry from 7.2% rate reported this time last year, indicating that the economy is slowly regaining its footing.
Meanwhile, with the growth in employment, budget line items attached to payroll are also increasing. For the 12-month period that ended in June, the BLS reported that the cost of benefits for private industry workers jumped 2.4% and compensation was not that far behind at 2%.
If labor market activity is increasing, then you can argue that talent mobility will soon increase, or could soon increase, in which case companies could start to see pressure on pay, says Laury Sejen, managing director of rewards at Towers Watson. In 2015, the consulting firm predicts that U.S. employers are planning to give an average 3% pay raise to exempt non-management employees.
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For some industries, the war for talent may already be here, but others indicate that they are not effectively carrying out their base pay and annual incentive programs. Towers Watson finds only half of the 32,000 employees surveyed in its Global Workforce Study say they are paid fairly or that managers are effectively reflecting their performance in pay.
Nearly 40% of employers say managers carry out their base compensation program well, and 53% say that they are doing a good job with their annual incentive program, according to the more than 330 U.S. companies surveyed in the Towers Watson Talent Management and Rewards Survey.
The sense is, and its reinforced by the employee data, there is opportunity for the effectiveness of managers when it comes to pay delivery, says Sejen. And it starts with whether or not goals have been appropriately set in the first instance and then clearly conveyed to employees.
Thirty-five percent of employers said they believe employees understand how base pay is reached. Meanwhile, 61% think that their workforce understands how annual bonuses are calculated.
When it comes to pay, its hard because budgets are small, explains Sejen. If you shift from base pay to bonus, bonus funding has been below target for several years, and sometimes its a challenge to make those tough decisions.
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Approximately 91% of U.S. organizations currently offer variable pay programs, according to the more than 1,000 companies surveyed in Aon Hewitts 2014 U.S. Salary Increase Survey. Investments in bonus pay, which alleviate the fixed costs tied to raises in base pay compensation, are also expected to increase to about 12.7% of payroll in 2015.
More than ever before, organizations in the for-profit, not-for-profit and even academia, are approaching variable pay with an open mind. Actually, many are asking whether they are getting a good return on investment when it comes to their talent, says Ken Abosch, Aon Hewitts North American compensation practice leader.
[Variable pay programs are] finding their way into sectors that havent traditionally made use of it, Abosch explains, so higher education is one sector, but maybe the most striking example is the not-for-profit sector.
Whats behind this push? Abosch notes the war for talent that is becoming more prevalent.
If youre an educator, or youre an association, and youre trying to find the best talent, you know have to compete with organizations that are paying bonuses, he says.
