Salary Freezes & Reductions: Rollbacks on the Horizon

The economic picture, at least from the standpoint of salaries, is beginning to get a little brighter.

In the latest installment of their research on the impact of the recession (this round conducted earlier in October and reflects  the plans/practices of 201 U.S. based companies), Watson Wyatt finds that more than half of those companies who have frozen or reduced salaries are planning reversal/reinstatement in the next 6 months.

The detailed findings salary-wise:

Salary Freezes

Of those companies that have implemented salary freezes...

54% plan to eliminate the freeze in the next 6 months

26% plan to eliminate the freeze in the next 12 months

6% plan to eliminate the freeze in the next 18 months

2% believe it will be more than 18 months before the freeze is eliminated

5% do not expect to reinstate salaries

7% do not know

Salary Reductions

Of those companies that have implemented salary reductions...

57% plan to reverse the salary reduction in the next 6 months

20% plan to reverse the salary reduction in the next 12 months

3% plan to reverse the salary reduction in the next 18 months

7% do not expect to reverse the salary reduction

13% do not know

Click through to the Watson Wyatt report for more information including plans for reversing/reinstating changes to benefit programs, mandatory shutdowns/furloughs, reduced workweeks, training programs and travel restrictions.

Global 2009 & 2010 Salary Budget Trends

Towers Perrin has recently released the results of its 2009/10 Global Compensation Planning Report, conducted in July and August 2009, which features 2009 salary movement and 2010 projections for companies across 76 countries.

The exhibit below features salary budget results from a selection of 18 countries:

 
  
For more information on the study, click here.
  

Top Three Reward Strategies for 2009

Each fall for a number of years, I have conducted an annual compensation planning survey among organizations in my market.  My favorite part of the survey is the final open-ended question where I ask each participant "what reward strategies and tactics did your organization find most successful in attracting, retaining and motivating employees in 2009? (or whatever the most recent year has been)"  The responses are always revealing and it is particularly interesting to see how they trend over time, through good economic years and bad ones.

This year's survey includes over 100 employers.  Their top named reward strategies for 2009 - through what has for many been a year of unprecedented challenge and difficulty - are as follows:

Number 1: Paying for Performance.  Participating employers cite their efforts to reward employee performance (37%) as the most successful strategy - the one that has paid off best in terms of employee attraction, retention and motivation - in 2009.  Out of the performance pay efforts noted by participants, incentive compensation is mentioned the most often, by 23% of respondents.

Number 2: Maintaining Competitiveness.  The reward strategy mentioned second most often (22%) is an effort to keep programs competitive during a difficult year.  Specifically, maintaining salary (16%) and benefit (12%) competitiveness are the most common efforts noted in this regard.

Number 3:  Communication.  Communication is mentioned third most often (18%) as the strategy that paid off most in 2009 - specifically frequent, open and honest information sharing (17%).

Your thoughts?  How does this match up with your reward experience in 2009?

The Teeny, Tiny Merit Increase Series: Doing Well with (Very) Little

Struggling with how to get the most out of a very limited salary increase budget?  Well, besides the (limited) comfort you can draw from knowing you have lots of company, help and guidance is now available!

Check out the Teeny, Tiny Merit Increase Series, a selection of three posts by Compensation Cafe's Margaret O'Hanlon, which serves up some solid advice on how to get the most from those limited dollars.

In What a Relief! 10 Different Ways to Slice a Teeny, Tiny Merit Increase Budget, Margaret highlights 10 approaches for prioritizing and distributing scarce salary dollars.

In 10 Tools for Communicating a Teeny, Tiny Merit Increase Budget, Margaret walks us through 10 different techniques for handling the difficult pay messages behind this year's skinny increase budgets.  Some of the best pay communication advice out there - no kidding!

In 10 Things Your Managers Must Tell Employees About Your Teeny, Tiny Merit Budget, she highlights the 10 tough and emotional questions employees will likely to pose to their managers about their salary increase in this tight year and urges you to help position managers to answer them appropriately and consistently.

And while you're at it, add Compensation Cafe to your reading list and get subscribed today.  Besides Margaret and me, we have a solid team of compensation professionals bringing you straight talk, original thinking and caffeinated discussion on a wide range of reward topics - punctuated by some talented guest bloggers who weigh in from time to time.  Join the conversation!

Image: Creative Commons Photo "wealth of pennies" by r-z

Think Twice Before Calling It a Cost of Living Increase

I've ranted on this before, I know.  But the salary planning challenges presented to us by the economic downturn have produced a resurgence of talk about cost of living increases - much of it by people who may not have thought through the implications of their choice of terminology - and so I beg your indulgence one more time.

With salary increase spending at record lows, a number of employers are considering the path of least resistance for 2010 ... simply spreading the available dollars evenly across their employee population.  That's fine, just please don't call it a cost of living increase, unles that is what you truly intend.

There is a critical difference between paying "cost of living" and paying "cost of labor".  Cost of living reflects the cost of goods utilized by a typical consumer, including items such as housing, groceries and transportation.  Cost of labor reflects what a particular geographic market offers as compensation for a specific type of work.  I advise my clients to be very, very clear about what their compensation philosophy is, and what their compensation program is designed to deliver, relative to this distinction.  In other words, is the purpose of the compensation program:

a) To reimburse employees for their cost of living?

or

b) To pay employees a competitive wage or salary for the particular jobs they perform and the specific skill/capability sets that they offer to the organization?

It isn't simply a philosophical distinction; the numbers themselves can be quite different.  Look at the chart below.  The blue line reflects the increase in the Consumer Price Index as reported by the U.S. Bureau of Labor Statistics for all urban consumers for the 12 months ending in each of the years shown (2000 through today) - our proxy for the cost of living.  The red line reflects the average salary increase across all employee groups as reported by WorldatWork's salary budget survey for each of the years shown - our proxy for the cost of labor.

   

Not exactly the same, are they?

That's why it's important that your words match your intent.  If the CPI spikes 7% over the next 12 months and the average salary increase only rises to 3.5%, do you intend to deliver a 7% raise to all your employees?  No?  Then you'd better watch your language. 

 

2010 Salary Planning Roundup

As has become a tradition of sorts here, I have compiled the high level 2010 salary planning data from a number of the most well-known sources and am presenting it here ... for your reading pleasure.

The table below features research on average salary increases (both actual 2009 and projected 2010) from the salary planning surveys published by Watson Wyatt, WorldatWork and Hewitt, organized by employee group.  I will try to add more as they become available - either here or in separate posts.  (Readers, let me know if there are other worthwhile studies that should be included here.)

(Note: I believe that all these figures are inclusive of zero's)   

Senioritis and other Compensation Challenges

One of the tasks we face in matching a job to compensation surveys, in order to establish its competitive value, is ascertaining the appropriate "level".  Is it an Engineer 1, 2, 3 or 4?  A Graphics Designer Senior or a Graphics Designer Intermediate?

Being involved in some of these deliberations with my clients and seeing a lot of survey data over the years, I've become aware of an interesting trend.  At one time in these survey databases, there was something more closely approximating a bell curve at play.  The majority of incumbents in a job family were in the middle or intermediate level, with a few sitting above and below this in the entry and senior levels.  These days, things look different.  Although the level definitions in most surveys have not changed, we find that the number of employees pegged at the senior level rivals - and often surpasses - those at the intermediate level.  The entry or beginning levels in many of these same surveys have all but disappeared due to neglect.

What's behind the epidemic of senioritis?  Is this yet another manifestation of grade creep?  What's going on behind the scenes here?

Is it another entitlement issue, a reflection of a generation of employees who expect to walk in the door with no credentials and immediately assume the responsibilities of a seasoned (intermediate) Accountant, be promoted to Senior Accountant six months later and be considered for the CFO's spot after 2 years?

Is it a case of managers trying to do the best they can by employees in times of low to no salary increases by revising their job descriptions in the hopes of using an "upgrade" as a mechanism to deliver more salary dollars?

Or is the learning and development curve undergoing such radical change that employees are being asked to take on more complex responsibilities and more decision-making at a faster pace than in years past?

My take?  All of the above, I think.

The entitlement thing is there, for sure, rearing its petulant head and turning traditional career development norms as well as internal job relationships on their heads.  And managers have been attempting compensation program work-arounds since the dawn of time - some for admirable reasons, others not.

But I am also seeing more organizations - often newer and more entrepreneurial employers - who are genuinely pushing the envelope byplacing people into roles and asking them to take on accountabilities way beyond their years and credentials.  And then facing the decision about the right way to compensate these individuals for these accelerated career trajectories.

The key, I think, is to arrive at an honest assessment of your organization's particular staffing policy and then positioning your reward program (particularly salary management practices) accordingly.  I realize that this, in itself, can be a tall order; there are plenty of employers paying lip service to Scenario 3 (accelerated careers and roles) who are simply in denial about and unwilling to deal with Scenarios 1 (entitlement) and 2 (pay program manipulation).

How many of you are seeing evidence of senioritis in your organizations?  How are you addressing it?

Free WorldatWork Salary Planning Webinar

A reminder to readers that WorldatWorkwill be holding a free webinar on salary budgeting and planning, Making Today's Decisions for Tomorrow's Business, on August 25. 

The webinar is open to non-members as well as members, and will be held at 12:00 to 1:30 p.m. Eastern, 9:00 to 10:30 a.m. Pacific, and 4:00 p.m. to 6:30 p.m. GMT.

The webinar is designed to...

... help you see what’s happening in the competitive labor market and why it’s important that you look beyond what is happening in your own company. Through SBS Online, our new interactive data analysis tool, you’ll also be given a quick look at the hardest hit areas and industries. Participants will have the opportunity to discuss with other attendees and panelists about what they are hearing vs. what the data really says.

Attendees will:

• Learn how to read salary budget data
• Find out how to identify the best demographic slices of data for each organization
• Find out how others are managing salary budget processes in such turbulent economic times
• See real time results generated with SBS Online

Don't miss this great opportunity get a leg up on your salary planning challenges!

On the Question of the Zeros

A formerly small question takes on a more significant meaning in this year's salary budgeting process.  The question, essentially whether to Count the Zeros or Discount the Zeros, is covered at length by JC Kovac and Jim Stoeckmann of the WorldatWork blog Compensation Conundrum

JC describes the dilemma underlying the question as follows:

A lot has been made about the 2.2% salary budget projected for 2009, and how it is a drop of 1.6 percentage points from the 3.8% of 2008. I have read many articles quoting our survey and others discussing the disturbing trend of lower increases and projecting those increases into the future — the "new normal."

Now, I am struggling with this data. The SBS is accurately reporting the average increase at 2.2% — however, that number includes all organizations that are reporting 0% increases this year. In previous years participants who projected no increase (0%) numbered only 2-3% of total respondents, but this year that number jumped significantly (30-40%+ based on employee category). By removing the 0% respondents, the average increase (of those giving an increase) sits around 3.1%. Now, 3.1% is still less then 3.8% of yesteryear — but it is still significantly better than 2.2%.

Recent advance data released by Watson Wyatt (and covered here) presents a similar set of data (and questions) as the early WorldatWork results.

For those of us seeking high level guidance on where to set next year's salary budget ... what to do?  Do we use the figures with zeros or the figures without zeros?

The answer is ... Yes.

(You knew I wasn't going to make this easy, didn't you?)

Yes ... because both numbers tell you something important about what's happening in the labor market. 

The "with zeros" data gives you a snapshot of the market in its entirety, the speed at which salaries are moving on average, considering all employers, those who are/have awarded increases as well as those who are not/have not.

The "without zeros" data tells you what is happening at those employers who have remained financially strong enough to commit to salary increases and who will be in the best position to compete for your employees.

How much relative weight you give to either figure must reflect your particular situation, including, as Jim says, "things like turnover, time-to-fill hiring trends, hot skill concerns, strength of business performance, and similar data related to an organization's particular circumstances."

These are interesting times, and interesting times will demand that more thought and analysis be applied to what may have been relatively straightforward decisions in the past. 

No way around doing your homework this year.

 

Today's Cheap Hire ... Tomorrow's Internal Equity Issue?

I've been through the economic slowdown and recovery cycle before, as have many of you.  As such, I find it helpful to consider that history and try to anticipate the challenges that may be waiting around the bend, ready to ambush us as the economy improves. 

One frequent side effect experienced during job market comeback is internal pay equity problems.  As the typical organization recovers and resumes its hiring activity, inequities arise between new hires brought in during the improved economy and current employees, whose pay has been stagnant (or worse) or who may have been hired "on the cheap" during the downturn.  Morale and retention issues ensue and Human Resources is faced with brokering a solution, which invariably involves market pay adjustments along with other tactics. 

Many employers have taken advantage of the recession to "purchase" talent that they might not normally be in a position to afford ... and I appreciate that this represents a smart investment on their part.  But these employers would be well-advised to keep a watchful eye on the market cost of this talent as the economic picture changes lest these investments turn sour on them.  Reactive pay adjustments are invariably bigger than proactive ones, and reactive dollars are rarely as well spent as those delivered with a proactive message and intent.

And so ... forewarned is forearmed: those investments in underpriced talent need to managed carefully as the tides turn in order to truly maximize return.