More Early Salary Budget Data: Salary Increases Look to Hold Steady in 2009

Preliminary results from the CompData 2008 survey shows pay budgets essentially remaining flat from 2008 to 2009.  According to the survey, salary increase budgets were reported at 3.60% for 2007 and 2008, and are projected to be 3.62% in 2009.

Although these early figures are a little lower than those released at the beginning of May by Economic Research Institute, which reported average 2008 salary increase budgets of 4.1% and 2009 projections of 4.0%, they do reinforce the theme of flatness.  Based at least on what we are seeing so far, it doesn't appear that 2009 increases, on average, will be substantively different from 2008. 

More to come on this, as some of the largest salary budget surveys will be releasing results later into the summer.

Just Don't Call it a Cost of Living Increase

We are all feeling the pressure of rising prices, and our friends at the Economic Research Institute predict that this will soon translate (and for many of you, perhaps already has) into pressure from employees to address the increase in cost of living.

Step carefully, for this is slippery territory.

I have posted before on the distinction between cost of living and cost of labor, an absolutely critical one when it comes to compensation philosophy and compensation communication.  It speaks - I believe - to the very purpose of your pay program.

Is it...

1. To reimburse employees for their cost of living, or
2. To pay employees the market cost of their labor?

Cost of labor reflects what a particular geographic market offers as compensation for a specific type of work.  Cost of living reflects the cost of goods utilized by a typical consumer (i.e., housing, transportation, groceries, etc.)

More on the cost of living and cost of labor from Linda Lampkin, ERI's Research Director:

What you spend -- your specific cost of living -- depends on how you choose to spend your money. And what you earn depends on what you do for a living and where you do it. The reality is that different people have different expenses, even though cost of living is often discussed as if it were a single discrete universal number.  The federal government tries to measure the changing prices of a fixed market basket of goods and services over time, but there is no one single cost figure that accurately measures individual expenses. The real 'cost of living' is based on decisions by individual consumers on how to spend the money they have.

Setting and adjusting wage/salary levels in light of today's dynamics is a tricky thing.  It must be done thoughtfully, with clear intent and informed by the right set of data.

And so, repeat after me:

We pay cost of labor, not cost of living.

We pay cost of labor ...

On Employees and Pay Maximums

Some of the most challenging conversations that I've had in the course of my compensation work have been with employees who were either at or over the top of their salary range maximums.  I'm guessing more than a few readers can say the same.  Following a comment exchange on this topic with a reader in a recent post on lump sum merit increases, I decided that a separate post might be in order.

Organizations with formal compensation programs in place typically establish salary ranges (or steps or schedules) for the purpose of managing base salary decisions in a consistent and equitable way.  Inevitably, based on continued tenure (or for a host of other reasons), employees reach the maximum salary rate for their assigned range or schedule.  On the positive side, range or schedule maximums are typically set at a premium over the "going market rate" for a position (in my experience, 15% to 20% is most common), so the employer has presumably allowed for some "extra" to reward those who have performed well in the position over time.  Also, it is good news that most organizations review and adjust their ranges and schedules on a regular basis in order to keep them competitive, thus providing even "at max" employees some opportunity for movement.  There is also the practice of providing lump sum merit awards in lieu of salary increases, in an effort to keep these employees "whole".

The undeniable bad news, however, is that employees in this situation will likely see their annual income move very slowly going forward.  Particularly in times of rising costs, this is not welcome information.

As a reward professional, I have two thought streams on this.

First, this.  It is a real but sometimes hard-to-swallow fact that different jobs and skill sets command different pay rates in the market for talent.  Accordingly, every job and skill set faces a pay limit related to its value in the market.  Want to earn more?  Then learn new skills, increase your capabilities, get a degree (all of these preferably in a high demand talent area) - in general, figure out how to bring more value to your (or any) employer.

I rarely, of course, get the standing O when I deliver this speech to a group of employees.  But I do it anyway, because I think I owe them the information and perspective, and because I think it is important for all of us to understand how the market for pay works.  And for all of us to appreciate that we each have a role and a responsibility relative to our wish to maximize our income.

Ok, then.

There is the other (second) side of the coin as well.  Employers, HR and reward professionals: If we are really about talent management (and not just personnel administration), we should be looking at these situations and asking ourselves is this a case of an overpaid employee or an underutilized asset?  Have we truly considered whether or not we can better leverage this person's talent and abilities in a higher value role?  Are we providing tuition benefits and other support that the motivated employee can tap into on their quest to continuously improve their skills?  Does our annual performance management process include (or mandate) regular conversations about stretching and development?

Certainly, it is often the case that we have set the employment stage well, with all the necessary support and assistance, and it is up to the employee to take the ownership and initiative for the next step.  But I'd like to leave you with Thomas Friedman's (he of The World is Flat, one of my favorite books) recommendation for the new employment contract between today's employers and employees, as food for further thought:

You give me your labor, and I will guarantee that as long as you work here, I will give you every opportunity-through either career advancement or training-tobecome more employable, more versatile. 

Know Ye the Regs When Awarding Bonuses or Lump Sums to Nonexempts

Cash incentive, bonus and lump sum merit awards are becoming increasingly prevalent for all employees, including those determined to be nonexempt from the requirements of the Fair Labor Standards Act (FLSA).  Many employers do not realize that there are regulations governing how these awards impact the compensation of nonexempt employees.

Bonuses paid to nonexempt employees are included in the determination of their regular wage rate, which impacts any overtime payments, unless the bonus falls into one of several exceptions.  To help us with the detailed ins and outs of these regulations and to shed light on the exceptions, Michael Moore of the Pennsylvania Labor and Employment Blog has a very helpful and informative post on the topic up today.

I learned a few things from Michael on this topic.  I was not aware of the first exception he mentions - the percent of total earnings bonus - and I take this as a piece of good news.  Many of us in the HR and rewards fields are most aware of the discretionary exception, but applying it means that you essentially abdicate tying the bonus to performance in any way, not an attractive choice for many employers.  I believe that this has prevented a number of organizations from offering a bonus or cash incentive plan to their nonexempt staff.  The percent total earnings exception, while laden with its own complications, provides a solid alternative worth considering.

Michael and I connected over his comment to my recent and related post on lump sum merit increases for "over max" employees - and decided that both of our readers would greatly benefit from more information on the regs surrounding nonexempt bonus/lump sum awards.  And for those who aren't already familiar with it, Michael's blog is a great source for keeping abreast of the legal angles of compensation and other HR topics - an excellent one to add to your reading list.

Offering Benefits to Part-Timers

We did a bit of research this week, for a client, on the topic of benefits for part-time employees.  Thought I'd share a few tidbits here.

The upshot:  About half or more of all organizations offer some benefits to part-time employees.  Bigger organizations are more likely to do it than smaller organizations.  Not-for-profit organizations are much more likely to do it than their for-profit counterparts.

The benefit most commonly offered to part-time employees (about 75%-80% of employers nationally) is the opportunity to participate in a defined contribution plan (i.e. a 401k).  On average these employers require a minimum number of hours  of just over 1,000 annually in order for a part-time employee to be eligible.  The next most common benefit offered to part-timers is paid vacation (about 70%-75% of employers nationally), with a similar average eligibility hurdle.

Based on the studies we considered, the benefit offered least often to part-time employees is disability coverage (less than 50% of employers nationally).

Quickie Primer on Lump Sum Merit Increases for "Over Max" Employees

A recent client question reminded me that not every HR professional is familiar with the use of lump sum merit increases as an approach for rewarding employees who have "topped out" by reaching (or passing) their salary range maximums.  With this in mind, here is a quick post on the basics.

(I suspect that a number of readers may already be well versed in this topic.  For those who are, please feel free to weigh in with your thoughts, experiences and any tips.)

Ahem.  To start with, let's define what we are talking about when we use the term lump sum merit increase. 

A lump sum merit increase is not really an increase at all, but rather something provided in lieu of a salary increase.  Rather than being added to the fixed base salary, the lump sum is delivered in the form of a single cash payment, separate from base salary.  For this reason, it is also (and probably more accurately) referred to as a lump sum bonus.

While there are other applications, the most common use for the lump sum merit increase - to the best of my knowledge - is as a substitute for a salary increase for those employees whose salaries have already reached - or surpassed - the maximum of their assigned salary range. The rationale is typically and simply this:  the employer wishes to recognize and reward employees who are performing well in their job, but whose salaries have reached a point where no further increases are allowed.  So the employer does so with a lump sum award, which does not exacerbate the "at or above max" problem by increasing the fixed base wage, but does provide the employee with a cash reward for their performance.

In most of the situations that I have encountered, the amount of the lump sum merit award is identical (as a % of base salary) to what the employee would have earned via the guidelines if they were still within the confines of their salary range.  In other words, if the merit increase guidelines suggest a 3% increase, the employee receives a lump sum award equal to 3% of their current salary.  I have seen a couple of situations where the lump sum award is reduced from that level suggested by increase guidelines (i.e. 50% of the amount suggested by guidelines).

(Note also that, in the interest of compliance with the Fair Labor Standards Act (FLSA), in situations where a non-exempt employee is involved, the organization must include this lump sum payment when determining the employee's regular rate of pay for the purposes of calculating overtime.)

That's my take.  Other perspectives and experiences?

Something Else That Fortune's Most Admired Companies Do Better: Reward Communication

According to Hay Group's research and analysis, Fortune magazine's Most Admired Companies do a better job than the rest of us at communicating the value of their reward programs, and they do it via regularly reward statements for their employees.

From the research:

How important is this?  In recent research on reward communication conducted by WorldatWork and Dow Scott of Loyola University, repondents rated individualized compensation or total reward statements as the most effective pay communication method, for base pay (84% rated effective or very effective), short-term variable pay (83% rated effective or very effective) and benefits (88% rated effective or very effective). 

And yet only about half of Fortune's peer group takes this communication step, and less than 70% of those organizations surveyed in WorldatWork's research say that they provide compensation statements.

Tough to appreciate the value of your total compensation package if your employer isn't providing you with that information in a clear format, on a regular basis.   

Carnival of HR (#34) is Up!

The Carnival of HR is up in its 34th edition at the Pennsylvania Labor & Employment Law Blog.

Stop by and check out the array of posts offered for some excellent HR reading!

Image: Rachel Montiel

Are Sales Managers Being Left Out of the Sales Compensation Loop?

Sales compensation plans undergo frequent change these days; 76% of respondents in a recent study say their plan is revised either every or every other year, with 65% indicating that a plan revision occurred in 2008.  And yet many organizations appear to be leaving first line sales managers out of the loop at launch time.

New research from WorldatWork and the National Association of Sales Professionals, featuring over 400 participating HR, compensation and sales professionals, indicates that nearly 40% of the responding organization do not appear to have a clear strategy or approach for preparing first-line sales managers to manage the launch of a new or revised sales compensation plan.  In fact, 14% of the respondents say that they bypass sales managers and go directly to sales employees when communication new pay plans.

To me this is symptomatic of a bigger issue surrounding sales compensation and sales management.  Because of the heavily leveraged (read low or no base, high incentive or commission) pay plans for most sales people, there appears to be an underlying assumption that the pay package will, and in fact should, manage the sales people for us.  This can be (and often is) an issue with any incentive plan, but it makes a more acute appearance in the realm of sales incentives.

I see it frequently when I participate in sales compensation design team discussions, where we are constantly battling the urge to have the plan address each-and-every-possible-desired-behavior-or-outcome, until the plan threatens to collapse under its own weight.  As if the sales managers themselves have no role or authority to deal with performance questions or challenges.

And maybe they don't.  But that - our apparent failure to capitalize on the role of sales managers in driving sales performance - seems like a pretty big oversight to me.

Readers, are you seeing this trend in the organizations where you work and/or consult?  What are your thoughts?

Submitting to the "Tragedy" May Bring Darth Vader - and Forced Rankings - to Your Door!

We're gonna take our "Tragedy of the Commons" story and give it one last shake, all.

Kris Dunn, editor and team lead at Fistful of Talent, shares his take on the tragedy ... and its potential consequences here.  Not willing to force - or accept - accountability for honest performance assessment?  Then you may have an ugly outcome headed your way.

Check it out.  And if you aren't already subscribed to Fistful, with its diverse group of bloggers covering all things Talent, get it done.