Believe it or not, there is a real talent shortage in America, as many employers struggle to find candidates with the skills they are looking for.  I know what some of you must be thinking - in this economy?  Yep, the talent shortage is real.

Mind you, there certainly isn't a shortage of workers, just a shortage of workers with the skill sets that employers are seeking.  By most estimates, there are well over 10 million unemployed workers in the U.S., and an even larger number of "under-employed" workers in today's labor market.

A recently-published study conducted by Manpower shows a dramatic increase in companies reporting difficulty in attracting the talent they are seeking, rising from 14% in 2010 to slightly over half (52%) in 2011 here in the United States. Most other countries show an increase in recruiting difficulties in 2011 as well, but the U.S. had one of the largest increases (along with India).  The graphic below shows the percentage of employers reporting difficulty in recruiting workers with the skill sets they are seeking.

A large percentage (75%) of employers site a lack of knowledge, skills or experience as the primary reasons for difficulty in attracting and hiring the talent they are seeking.

The survey found the greatest difficulty in recruiting the following roles:

• Technicians and technical specialists
• Sales representatives
• Skilled trades workers
• Engineers
• Laborers
• Managers/executives
• Accounting and finance professionals
• IT Professionals
• Production operators
• Administrative staff - administrative assistants, etc.

At least in the Pacific Northwest, we are seeing shortages of several types of engineers (especially software engineers), experienced technical professionals, technical consultants, registered nurses, and believe or not, experienced compensation/rewards professionals and executives.

Just because the labor market is weak and the unemployment rate high, doesn't mean that it's easy for employers to find all the the skill sets they are looking for.

Is it actually possible that we could have moderate healthcare cost increases in 2012?  For those of you that follow this type of information. you're likely aware that "moderate" is not a word that accurately the trajectory of health care costs over the years.  Even during the very week economy of the past few years, healthcare costs have risen 8% - 10% per year.

Preliminary results though from Mercer's National Survey of Employer-Sponsored Health Plans 2011 though is predicting a very modest (by health care standards) increase if 2012.

The latest Mercer survey finds health benefit cost growth for 2012 likely to be the lowest in 15 years:

• Preliminary data from Mercer's annual survey indicate that the average cost of employee health  coverage will rise 5.4% in 2012 (after modest plan modifications).
• Slowdown in utilization of health services is holding down cost growth.
• Employers are increasing their investment in consumerism and health management.
• The rising gap between health benefit cost growth and workers' earnings remains.

Preliminary data from the Mercer survey suggest that the average growth in health benefit costs will slow to 5.4% in 2012, the smallest increase since 1997.  Still, cost growth remains well above both general inflation and growth in workers' earnings (see Figure 2). 

While this increase reflects cost-cutting changes employers will make to their current health benefit programs, such as raising deductibles or moving employees into lower-cost health plans, the survey findings released by Mercer suggest that the underlying trend has slowed as well.  Asked how much cost would rise if they made no changes to their current plans, employers reported an average increase of 7.1%. Over the past five years, this underlying health benefit cost trend has been running at about 9%.

The slower trend is good news for workers, because an employer's first line of defense against a high initial renewal rate typically is to change plan provisions so that employees pay more out of pocket for health care. If the underlying trend is lower to begin with, employers will be likely to engage in less cost shifting than they have an recent years.

Understanding the slower cost growth for 2012 means looking at the factors working to hold down the underlying trend along with the actions employers are taking to reduce cost next year. Use of health services, which slowed this year, is one such factor. Some analysts believe the tough economy, combined with generally higher deductibles and other forms of cost-sharing, is affecting utilization – that because employees have less disposable income and are working longer hours, they are less likely to seek non-urgent care.

Employer cost management tactics for 2012

While the underlying cost trend may slow in 2012, an increase of more than 7% – twice the rate of general inflation – is still higher than many employers are willing or able to absorb.  Some plan to shift cost to employees by raising premium contributions in 2012. Employers are slightly more likely to increase contributions for dependent coverage (36%) than for employee-only coverage (33%). The difference is greater among the largest employers (42% will raise dependent contributions and 36% will raise employee-only contributions); they may be attempting to compensate for enrolling more dependents under the health reform law's rule stipulating that employees' children up to age 26 be eligible for coverage.

About a third of the survey respondents (33%) say they are raising deductibles or co-payments in 2012. The past five years have seen employers increasingly using this type of cost-shifting, driving the median in-network PPO deductible for an individual to $1,000 among small employers (those with 10–499 employees) and to $500 for large employers last year.

One way employers can give employees a stake in their health care spending without creating a disincentive to use health services when needed is with consumer-directed health plans (CDHPs). These are high-deductible plans with an employee-controlled spending account – a health saving account (HSA) or health reimbursement arrangement (HRA). Many of these plans give employees an incentive to take cost into consideration when seeking health care services by allowing them to save, on a tax-advantaged basis, account dollars they don't spend in a given year for future needs. Preventive care is covered in full.

"We're expecting to see a spike in 2012 in both the number of employers offering CDHPs and in the number of employees enrolling in them," said Beth Umland, Mercer's director of research for health and benefits. "Employers see them as a way to provide more value to employees while at the same time managing cost."

CDHPs are significantly less expensive than traditional PPOs or HMOs – by about 15%, on average. The use of CDHPs has been growing steadily over the past five years, particularly among the largest organizations. In 2010, offerings of CDHPs ranged from 14% among employers with 10–49 employees to 51% among those with 20,000 or more employees.  Survey results suggest there will be an increase in offerings of these plans in 2012: 18% and 58% of the smallest and largest survey respondents, respectively, say they plan to offer a CDHP in 2012.

"While 2012's slower cost growth is welcome news, it's still higher than the CPI – which means employers won't be letting up their efforts to control costs anytime soon," said Susan Connolly of Mercer. " Advanced strategies like limited provider network plans and more intensive employee education and engagement will continue to evolve."

Of the approximately eight million jobs that were lost in the "big one" recession of 2008 and 2009, only about one million jobs have been recovered so far, a pitiful labor market recovery by virtually any standard.  Many economists today are predicting that it will take at least three to five more years before we recover these lost jobs and just get back to 2007 employment levels.

While the labor market as a whole continues to struggle, the the labor market for technology professionals exists in a parallel universe of high demand and short supply. In the Seattle area, for instance, technology employment surpassed its previous peak (of mid 2008) in the first half of 2011, while hiring remains brisk (see graphic below), and rates of unemployment are trending to near to zero percent for experienced technology professionals with current skill sets.  In the past couple of years, Google, Facebook, Zynga and several other technology stalwarts have built new (or expanded their existing) workforces in the Puget Sound region, while Microsoft, Amazon and other technology firms headquartered here continue to expand their labor forces.

Hiring for experienced technology professionals in the Puget Sound and Silicon Valley regions in particular has been quite brisk over the past year, prompting several calls and anecdotal reports from our contacts in the industry reporting of recruiting difficulties, wage compression issues (having to hire new employees at rates in excess of rates for similar employees already employed) and general stresses to hiring, payroll, and equity allocation budgets.

It's quite paradoxical that in this weak economy, while most areas of the economy is struggling, demand for technology professionals is reaching near "bubble" levels, with wage rates rising at a pace well in excess of the approximately 3% rate reported in most recently-published salary budget surveys.

The situation has become so acute that recently we issued a "special market update" to companies that we work with to help them understand and address these issues.  If you would like a copy of our recent client communications concerning these issues, please contact me at doug@appliedHRstrategies.com.

Join us for our 2011 annual "Reward Trends and Salary Planning" workshop at the Seattle Harbor Club.  Due to the issues described above, we are adding a special section to our fall program concerning dealing with the current high-demand/low-supply  environment for experienced technical professionals. See here for more information.

WorldatWork released its "Survey on Workforce Flexibility" report earlier this year.  Over 500 WorldatWork members from HR,compensation and benefits roles participated in the research. 

The research looked at a variety of workforce flexibility programs and found that on average, employers offered six different types of program concurrently.  The types of programs emphasized varied somewhat by different types of organizations: compressed workweeks are more prevalent in the public sector (68%); part-time schedules are more common among non-profit organizations (90%); and ad-hoc telework is more frequently offered by public companies (89%).  Surprisingly, the study found no correlation between the number of programs offered and turnover rates.

Organizations tend to tailor flexibility programs to fit the needs of their workforces as well as their own priorities. The most prevalent programs are "flex-time" (flexible start/stop times), part-time schedules, and teleworking (aka, telecommuting) on an ad- hoc basis. Each of these programs are offered to some or all employees in more than 80% of surveyed companies; when offered they are also the most commonly used by employees, with flex-time being the highest ranked in popularity.  

The study also found that a culture of flexibility was more important than how the various programs were administered. "When it comes to workplace flexibility programs, culture trumps policy," said Rose Stanley, a practice leader for WorldatWork. "It's not about the quantity or formality of programs offered; it's about how well supported and implemented the programs are across the organization."

Organizations that have a stronger culture of flexibility were shown to have lower voluntary turnover rates.  In addition, a majority of employers report a positive impact on employee satisfaction, motivation and engagement.

The study revealed several obstacles to the adoption of flexibility programs, which included: lack of training and top management resistance.  The study also found a lack of employee interest in some programs, such as phased return from leave, phased retirement and career on/off ramps.

In today's world of small merit budgets and weak global economy, workplace flexibility can be a key differentiator maintaining and retaining an engaged workforce.

Join us for our annual rewards trends and salary planning workshop on September 28th in Seattle!  See here for more information.

A recently published study by Buck Consultants suggests the recession and its aftermath have changed the compensation and rewards landscape, and some adjustments are needed to "revive and inspire" today's workforce.

After a period of severe dislocation in compensation practices (wage freezes and/or cuts, mass layoffs, small or non-existent merit increase budgets), organizations appear to be adjusting to a new set of norms.  While many practices will look similar, some elements are going to be taking on more or less prominence in the post-recession economy.

Since the beginning of 2010, there has been a significant reduction in special cost-cutting actions, including pay or hiring freezes, temporary layoffs or furloughs, pay cuts, and suspension of company matches to defined contribution plans.  According to Buck, as of January 2010, nearly two-thirds (64%) of organizations reported having implemented a pay freeze within the prior 18 months, a figure that dropped to less than half (48%) by August 2010. Buck Consultants' most recent study, Reviving and Inspiring the Workforce: 2011 Compensation Trends Survey, shows a further sharp decline in pay freezes to 9%, which is more in line with historical patterns.

Typical pay increase budgets also have shifted gradually over time, from a long-standing 4% to the current norm of around 3%.  Several recent studies have shown this same general trend.  While increase budgets have rebounded from recessionary lows, they are likely to remain close to 3% for the foreseeable future, assuming no significant changes, barring dramatic changes in inflation and/or the labor market, neither of which appear on the near-term horizon. It's not that organizations are unwilling to spend more, it's that they want to make sure it is worth doing so without committing to additional fixed costs in the form of higher payrolls.

Pay for Performance Dominates
With pay increase budgets stabilizing, an even greater emphasis is being placed on pay-for-performance programs in order to motivate workforces and attract and retain top talent. Organizations are finding that with fewer merit increase dollars available, setting appropriate variable pay budgets and selecting strategically-aligned plan metrics is more critical than ever.  At the same time, greater performance expectations are being placed on employees as organizations continue to look for ways to innovate and grow while containing labor costs.

Of course, effective rewards programs are about more than just money. In Buck's Reviving and Inspiring the Workforce survey, the top strategy for retaining top performers is to provide new career development opportunities (41%), followed by three compensation-related strategies: market pay adjustments (30%), larger base pay increases (24%) and larger bonus opportunities (21%). These findings reveal the importance of rewarding top performers, both thoughtfully in terms of what the employee values, and responsibly in terms of what is fiscally viable.

Continued Dependence on Variable Pay
Over the past three years, annual bonuses have varied widely depending on performance, as should be expected. With limited ability to make fixed-dollar increases during the past several years, variable pay programs came to the rescue for many organizations. What has remained consistent during this period are the budgets of most annual bonus programs, even though payouts varied widely during the the downturn and subsequent recovery. After all, there are no guarantees when it comes to variable pay, since they should be designed not only to encourage and reward desired performance when it occurs, but also to reflect financial realities.

According to Buck's most recent survey (February 2011), 31% of organizations have paid or expect to pay bonuses that are within plus or minus 5% of last year's amounts. An even larger number, 44%, expect bonus payments to exceed last year's amounts by at least 5%. One-quarter (25%) expect bonus payments to trail last year's amounts by 5% or more.

When looking at bonus payments versus targets, 44% of organizations report they have paid or expect to pay bonuses that are within plus or minus 5% of target. About one-quarter (27%) expect bonus payments to exceed targets by at least 5%, while 29% expect bonus payments to fall short of targets by 5% or more.

Attraction and Retention Trends
For some time now, organizations have been carefully watching for an uptick in turnover rates, which would begin to substantiate reports that employees are seeking new opportunities as job openings surface. While these indicators have yet to reveal sustained movement in the job market, evidence shows that organizations are maintaining or implementing programs that will enable them to attract and retain employees as the competition for talent grows and intensifies.

Approximately two-thirds (63%) of organizations report using hiring bonuses, while 41% report using or planning to implement retention bonuses. Two-thirds (66%) report an existing employee referral bonus program, where employees are typically eligible to earn multiple bonuses. Such bonuses can have the dual benefit of attracting a strong performer while helping retain the recommending employee.

Among organizations with referral bonus programs, 79% rate their programs as "equally effective" or "more effective" than other recruiting methods. Similarly, 53% of these organizations rate their employee referral bonus programs as "quite valuable" or "extremely valuable" when considering both effectiveness and cost.

While reward practices typically follow the ebb and flow of the economy and labor market, it appears that some new norms are taking hold (even if they have been trending in this direction for years): fewer dollars available for fixed dollar base pay increases, stable to improving variable pay budgets and payouts, a greater emphasis on non-monetary reward strategies, and renewed efforts to attract and retain talent.

Welcome to the "new" normal.  It's time to leave the COLAs and juicy merit budgets behind and move toward ways to retain and motivate high performers and to attract new high-potential workers!

Preliminary results from the WorldatWork 2011-2012 Salary Budget Survey were released recently, and show barely any changes for 2012, from the 2011 data. 

Even though we are technically two full years into an economic recovery, it's been one of the weakest recoveries on record, and so the impetus for a significant uptick in pay increase budgets is simply not there. At the same time as the economy is plugging along slowly, heath care costs continue to rise rapidly (up an estimated 8% in 2011 and 2012), putting the squeeze on employer compensation budgets.

Despite the generally weak economy and labor market, there are some pockets of significant strength, and thus the data below is not easily generalizable from industry to industry (more specific industry data will be available when the full results are released).  For instance, there is a strength in the technology labor market, the market for engineers, certain health care professionals, technically-oriented consultants, biotechnology-oriented scientists, and a few other pockets.  We would expect that data for many companies in these industries to exceed the overall data below.

On the other end of the spectrum, we would expect below-market level budgets for most of the weakest sectors in the economy, including local, federal and state governments, many non-profits, construction, and the many areas of the economy that serve these major sectors of the economy.

Over the next few months a lot of fresh data will be coming in from the many organizations that conduct various salary budget and compensation practice surveys, and we will update our readers periodically as this information roles in.

Applied HR Strategies will be hosting its annual rewards trends and salary planning workshop on September 28th in Seattle.  For more information, click here.

Medical costs rose sharply during the recession and are continuing to rise at several times the rate of inflation, despite a poor economy, weak demand for medical services and generally low inflation.  Despite what you may have learned in economics 101 in college, the law supply and demand has seemingly little impact on medical cost inflation.

Two recently published studies show or predict costs rising at an approximately 8% annualized rate, even while demand for medical services is not growing much and inflation remains at very low levels (other than gas prices, of course!).

The PricewaterhouseCoopers (PwC) Health Research Institute recently predicted that employer health care costs will rise by about 8.5% in 2012, after rising by about 9% a year in both 2010 and 2011.  Even with modest cost-sharing and other plan changes, most employers can expect about a 7% increase on health plan costs over the next year.

The recently published 2011 Milliman Medical Cost Index (MMI) reports that in 2010 costs increased at a 7.3% rate to an average of over $19,300 a year for a family of four on a PPO plan, more than double the $9,235 cost in 2002.  The employee portion of these costs have also more than doubled, from about $3,600 in 2002 to just over $8,000 in 2011.

As costs have soared over the years, the employee's share of the total costs have also been increasing.  The MMI report states that the employee share of total health care cost have increased to nearly 40% (39.7%) of total costs, up from 36.8% in 2005 when they started tracking this metric.

Neither report offers much hope for a reduction in cost growth (the roughly 8% current medical cost inflation rate is down from annual increases in excess of 10% for most of the last decade).  The likely ongoing trend will be further cost-shifting to employees, even with employers absorbing much of the increased costs.

We believe that the ongoing high medical cost inflation rate also has the indirect effect of keeping a lid on merit and pay increase budgets (even in better times), as employers have to incur ever-increasing fixed benefits costs, even in times of economic stress and low inflation (and low pricing flexibility for their own products and services).

The PwC report states that 84% of employers are planning to make changes to their health plans to try and offset some of the expected cost increases.  A similar percentage (86%) state they are likely to re-evaluate their overall benefits strategy, while one-half are considering reducing or eliminating subsidies on dependent medical coverage.

In the past year, I've heard more than a few comments such as "this is a recovery?" or "this recovery feels like an ongoing recession," or more pointedly "the job market sucks!"  If you feel this way, you're not alone!

By most measures, it has been a meek recovery, but when it comes to jobs, the recovery has been among the weakest in history, sharing honors with 2001 recession recovery.  The Conference Board thinks the lack of a jobs bounce is a developing long-term trend, as recent recoveries have delivered limited job growth in the first couple of years after the statistical economic bottom has been reached.

The reasons?  There are many, but some of the biggest contributors are long-term increases in productivity, employers expecting more and more from existing workers, and an openness to technology spending, while resisting investments in hiring.  Employers today seem much quicker to cut, but far more reluctant to hire when the pendulum swings back the other way.

Despite all this sobering news for the workforce of the 21st century, the recent news has been pretty good, even if many people aren't quite "feeling it" just yet. Just last week, the Labor Department reported that 244,000 more people were employed in April than the month before.  That makes three months in a row of monthly growth in excess of 200,000 jobs per month, well above the 150,000 threshold that is approximately what's needed to absorb organic growth in the labor force.

Here's what's happening with some major jobs groups these days.

Stone Cold:

• Construction (negative "growth" since 2009)
• State and local government employment (also negative)

Getting Slightly Warmer:

• Manufacturing (doing surprisingly well, considering the long-term trends)
• Leisure & hospitality (recovering slowly, after taking a beating in 2009)
• Retail and wholesale trades (retail sales are well above year-earlier levels)

Warm to Warmer:

• Health care (modest growth now, but it was never very weak to begin with)
• Engineering jobs (many employers are reporting shortages already)
• Experienced scientist roles in life sciences (in biotechnology especially)

Hot:

• Software engineers, in general
• Selected technology professionals, especially on the west coast
• Selected heath care professionals (nursing, etc.)

See below for a graphical overview of some of the larger trends (source: Wall Street Journal, May 7, 2011).

In summary, we are indeed recovering, despite appearances otherwise. Unfortunately for many the recovery has been quite uneven, so while some job groups are thriving today, others are barely feeling the recovery at all.

More to follow on addressing the hot jobs issues from an employer perspective in a future post.

Performance follows pay, or is it pay follows performance? It's an age-old question and not easily resolved, but we know there is a connection between the two, at least in high-performing organizations.

I thought you might be interested in the just-published i4cp report Performance Management Playbook: Tools and Techniques for Managing Performance.  Performance management (PM) has long been a thorn in the side of many organizations. In fact, two-thirds of the organizations surveyed by i4cp admitted that their performance management processes are inefficient.  It's difficult to imagine another process that consumes so much time and so many resources, yet all too often leaves participants feeling dissatisfied. At the same time, most organizations see the need for performance management and consider it important, even if less than effective.

A key element of any effective PM program is leadership buy-in and support. Without leadership buy-in, PM simply becomes a painful experience about which no one is quite sure why they are going through.  Nearly three-quarters of high performance organizations say their leaders consider PM to be vital to a high or very high extent. Only about half of lower performers said the same.

I once worked in an organization where late performance and/or poorly completed reviews were considered a serious management deficiency and chronically late managers usually became former managers. As a result, reviews were rarely late or brushed over.

The i4cp PM playbook goes on to highlight six common challenges to PM that organizations face and the solutions to overcoming them.  Below are the six challenges the playbook addresses.

1.       The performance appraisal process is perceived to be too complex and time consuming by employees at every level.

2.       Leadership does not consider performance management to be integral to overall business strategy.

3.       There is a disconnect between the pay-for-performance culture and the performance management process.

4.       Organizations often focus on the wrong aspects of performance management.

5.       The performance appraisal process is rarely calibrated properly, if at all.

6.       Performance management is not yet fully integrated with other talent management processes.

Just in case you're wondering if its really worth it to spend so much time and effort on performance management, see the table below and let me know what you think (many thanks to Ann Bares of the Compensation Force blog for allowing me to use her table!).

I believe the data coming out of the study clearly shows that it's worth the effort to incorporate effective PM as a key element to becoming a high-performance organization (or working to stay there).

More to follow in future posts...

Recently Towers Watson released its  "2010/2011 Report on Long-Term Incentives, Policies and Practices." Here are a few highlights of current trends:

Award Types and Emphasis Shifting

Back in the 1990s, companies overwhelmingly relied on stock options as their primary or exclusive long-term reward vehicle.  As we entered the 21st century, the use of restricted stock (RS) became more prevalent, especially after Microsoft and Amazon.com moved from options to restricted stock in the 2003 time frame.  The Towers Watson study showed options being granted at 89% of companies in 1999, with a steady drop to about two-thirds (68%) of companies in 2010.  During the same time frame, restricted stock usage soared from 14% of companies in 1999 to 71% in 2010.

Performance awards (shares that grant and/or vest based on meeting certain performance metrics) also increased from 48% to 69% in the 1999 to 2010 span, with most of these types of awards going to senior level managers and executives, although we are starting to see them become somewhat more prevalent at lower levels in some companies.

Blended Approaches Becoming More Common

With options, restricted stock and units (RSUs) and performance shares all fairly prevalent today, many companies today are utilizing more than one type of long-term incentive (LTI).  In 2010, more companies were granting at least two types of LTI awards -- 73% of survey respondents indicated this practice, an increase of 10% from 2009, and an even greater increase from prior years.  Larger companies are more likely to utilize two or more types of awards than smaller companies.  Pre-IPO companies are still largely reliant on utilizing options as their primary LTI tool.

Performance Awards Moving Up

Towers Watson is seeing a strong trend towards performance awards, which are now the second most common type of long-term incentive offered by survey respondents, jumping slightly ahead of stock options in the most recent study.  This trend is almost certainly going to continue.  So-called "full value shares" (RS/RSUs) were the most common type of LTI offered in 2010, but restricted stock seems to have possibly peaked, with performance shares continuing on the rise.  The National Association of Stock Plan Professionals (NASPP) 2010 Stock Plan Design and Administration Survey also showed a strong trend towards performance awards, although that study did not show them outpacing the usage of stock options as the Towers Watson study did.

LTI Award Values

For employees earning under $200,000, award sizes (as a percentage of salary) remained flat from 2009 to 2010 in the Towers Watson survey. For employees at higher salary levels, however, award sizes increased, although not quite to 2007 and 2008 levels.

Summary

Both in the Towers Watson study and in our own practice, we are seeing more companies move away from stock options as their primary LTI vehicle.  For many pre-IPO and early stage companies, however, options still make the most sense.  For public companies though, stock options are becoming a less frequentlyused and a smaller piece of total LTI package.  Due to the shifts described above, many companies are now using more than one type of equity in crafting their LTI offerings and moving a greater percentage of their offerings to full-value shares (RS/RSUs) and performance shares.