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!

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...

With the underfunded salary budgets of recent years, a promotion may have been the only way many employees could earn pay raises. Yet even those are fewer and smaller in today's labor market, according to the "Promotional Guidelines" survey recently released by WorldatWork. The survey of 720 U.S. organizations in late 2010 found that overall, respondents report an average of 8.1% of the employee population receive promotions in a typical year down to 7% in the most recent survey.

The average size of promotion has declined as well, though the executive group is feeling the pinch a bit more. While all employee groups — nonexempt, exempt,  and executives  saw declines in their average promotional increases, executives saw the biggest decline, from 11.4% in 2005 to 9.5% in 2010.

The most influential factors in determining the amount of the promotional increase are the pay range of the new position (66%), the rates paid to other employees in similar positions (60%) and external pay data (36%).

"A perceived lack of opportunity for career advancement and promotion can be demoralizing, especially to top performers," said Kerry Chou, CCP, CBP, GRP, a senior practice leader with WorldatWork. "Our study shows that organizations continue to plan for promotions and many even proactively budget for it separately from other pay increase budgets. Organizations ought to communicate and raise the visibility of promotions as one of the key elements of their total rewards packages."

As the economy picks up steam in 2011, it's likely that promotion will increase in frequency, and be more rewarding to those who receive them.  The WorldatWork study shows how pervasive the recession impacted the workforce.  Not only were hiring activities, workforce levels and salary budgets dramatically impacted during the recession, but so were our highest performers, the group that is most likely to get promoted and most likely to have the opportunity to move on to "greener pastures" during the recovery.

PS - Our 2011 StrategicPay Series training calendar has been released.  Click on the link to get more information!

The Changing Landscape of Rewards
Doug Sayed, SPHR, CCP, Applied HR Strategies, Inc.

The past two years has seen the quickest and most dramatic shifts in compensation (aka "rewards") practices ever.  In the past two years, we've witnessed "the sky is falling" near-collapse of 2008 to the "big one" recession of 2008 - 2009, and the end to entitlement compensation as we knew it (in 2009, when well over 50% of companies reduced and/or eliminated their salary increase budgets for the year).

Now that we're in allegedly in recovery mode, it is back to normal for compensation and  rewards professionals or something else (perhaps a "new" normal)?  I believe the answer is decidedly "something else."

Let's look at what's happening in some major areas of compensation and rewards, and you tell me if you think we're getting close to back to normal.

The Labor Market
Wow - what a mess!  Over eight million jobs were lost during the recession, and chances are that it will take at least three years or more just to get back to employment levels last seen in 2007.  The recent jobs recovery has been tepid at best, and when you take out government and temporary hiring there has been barely any job creation in the private sector.  Even though the official unemployment rate topped out at 9.9%, we've only dropped to 9.6% and without people dropping out of the labor market in frustration; I would wonder if unemployment has really dropped much at all.

Base Pay
Salary increase and "merit" budgets plummeted in 2009, and will remain at historically low levels (but higher than 2009).  If you were lucky enough to stay employed and get a pay increase, it was likely quite small by historical standards.  Overall, wages rose about 1.5% in 2009 according to government statistics.  If you include people who had to take pay cuts to land another job and/or take part-time or temporary work, the overall increase is likely close to zero.

With labor market weak and supply far out-stripping demand, wage growth will almost certainly be slow for years.  And with healthcare cost inflation continuing unabated; these increased costs will likely chew up most of employers' payroll increase budgets.

A few high demand areas will continue to do reasonably well.  Healthcare should remain firm, and many highly-skilled technology and biotechnology jobs are in good demand, relative to supply.  Overall though, there just isn't sufficient job demand to provide the impetus of anything but very slow wage growth in the near term.

Merit budgets will stay at historically low levels and employers are going to have to find other ways to "compensate" for the dearth of extra base pay dollars.

Employee Benefits
One of the biggest factors impacting employers' unwillingness to take their foot off brakes on trying to contain fixed costs are the unabated increases in the cost of providing healthcare coverage for their workforces.  While healthcare cost inflation has dropped a bit in the past year or two, it's still running at several times the rate of inflation, as it has been for most of the past two decades. 

Don't expect so-called healthcare reform to save the day (which was in reality, mostly healthcare insurance reform).  Employers will struggle to manage high healthcare cost inflation with competing compensation dollars for the foreseeable future.

Short-Term Incentives
One area that should show a nice rebound is in funding for (and payouts of) short-term cash incentives (often referred to as "bonus" programs).  The trend towards greater spending on short-term variable pay programs continues, despite a significant hiccup in 2009.

Budgets for variable pay have more than doubled as a percentage of payrolls since the early 90s and have continued to move slowly upwards over the years.  Hewitt predicts 2011 variable pay budgets will be between 11% and 12% of payroll, and forecasts 16% in 2020.  Of course, no one has a crystal ball, but I'm certain we are moving in that general direction.

Increased variable pay for results, rather than a return to more normal levels of merit pay for the masses are the general direction I see cash rewards going in the private, for-profit sector of the economy.

Long-Term Incentives
Long-terms incentives, typically provided in the form of stock/equity grants have been trending downward for non-executives for a few years now, starting well before the recession hit.  During the bear market for stocks everyone who received equity grants took a hit, but while stock-based compensation for executives may well rebound fully, they won't below the executive level, for a variety of reasons. 

In the post Internet bubble, post stock expensing world, the broad-based use of stock options has been declining for the past several years. According to one study by Equilar, the use of options in large public companies has dropped from 92.5% in 2004 to 77% in 2009. And while some other equity vehicles such as restricted stock had been on the rise during the same time period, their increase won't make up for the overall decline in equity granting levels that peaked early in the new millennium.

In addition to the reasons mentioned above, shareholders groups are generally unhappy with high burn rates (shares granted each year as a percentage of shares outstanding), high overhang (potential stock dilution from employee stock grants), and in some case the huge dollars that are spent re-purchasing stock to counter dilution from employee stock grants (in public companies).

Other Rewards
The 2010s may well become the era of non-dollar denominated rewards, or "qualitative" rewards, as companies strive for ways to retain and engage their workers.  With relatively few new fixed compensation dollars to going into workers pockets, these more qualitatively oriented rewards focused more on employee development, worker psychology, corporate culture and the like are going to be the next wave of rewards, in my opinion.

After many years of increasing demands on workers, many in workforce today are fed up with the "doing more with less" trend.  Multiple workforce studies conducted in the past few years have shown declining morale, commitment and engagement with work, and north of 50% of employees that claim to want to change job for the proverbial "greener pastures."

With the general decline in morale and worker commitment, efforts to enhance and improve the work experience are where the action is at for more forward-thinking organizations.

We would love to hear your thoughts on where you see rewards heading.

(For a more detailed version of this post, including graphics, please contact the author directly at doug@appliedHRstrategies.com).

Doug Sayed is principal at Applied HR Strategies, Inc., a Seattle-area compensation consultancy.  Applied HR Strategies is also partnering with the Washington Technology Industry Association (WTIA) on the development of the new WTIA Salary Survey, due to be launched in the late fall of 2010.

Get your 2011 compensation planning off to a good start by joining us for our half-day workshop "Rewards Trends and Salary Planning," 8am to noon on Wednesday October 6th.

This program has been approved for 3.5 HRCI certification credits.

This program will provide an overview of long-term reward trends and ideas for planning for the future.  For current planning purposes, we will provide the latest data on current market trends, including merit increase budgets, salary structure movement, etc., as well as instruction on salary planning, budgeting and merit plan design. 

Participants will walk away with a good picture of the current market conditions and several ideas for merit plan design, as well as the tools and templates to develop, model and implement inside their companies.
 
The cost includes a continental breakfast and parking validation, as well as a 20% discount on the purchase of the Base Pay Toolkit, if interested.

Workshop instructors are Doug Sayed & Jill Odegard of Applied HR Strategies and the StrategicPay Series.

For more information and/or to register, visit our training page.  We hope to see you there!

Last year well over 50% of employers cut their merit budgets or worse (eliminated them or cut base pay).  In a recent webinar I did for Salary.com, about 80% of the 200 or so attendees said they had cut or eliminated their salary increase budgets for the 2009. After the dust settled, 2009 pay increases were the lowest on record, under 2%.

While 2010 will see an increase in pay increase budgets (most studies are projecting 2.5% to 2.9% merit increases for 2010), these budgets remain at historically low levels, and the preliminary numbers for 2011 aren't much higher. Due to the extremely weak economic recovery, it's likely that even these low projected numbers will drop somewhat.

It's hard to imagine that the workforce will be too thrilled with these pay increases, especially when comparing them to what most employees typically received prior to 2009, but since nearly everyone will have modest budgets, it's not like they would do dramatically better elsewhere.  Of course, this assumes that your base pay and cash compensation programs are already competitive, that base pay growth and variable pay are tied to performance, and that you're taking care of your best employees. If not, these tasks should move to the head of your priority lists.

Countless studies in the past few years have shown that employee morale is dropping (and has been for two decades) and half or more or the workforce today is ready to seek out the proverbial "greener pastures" of a new employer.  But is pay the main issue driving  the discontent?  "No," say most of these studies. 

While competitive cash compensation is a critical element of any rewards program, once these basic needs are met, what's keeping the best performers with your company?  Assuming you've already taken care of these basic needs, it's your culture and how you manage and treat your people that can really make the difference (see my recent post on "Can't Buy Me (Workplace) Love" for more on this topic).  With employee loyalty and engagement at an all-time low, quality leadership and management are at a premium (see my colleague Laura Schroeder's excellent post on "...We Must Increase Our Trust") for additional supporting information.

But don't take our word for it. Check out the recent WorldatWork study on the linkage between various reward program elements and engagement. Bottom line: how your workforce is lead and managed is far more important than pay per se in determining workforce engagement and commitment.  The global recession has had a particularly negative impact on employee engagement according to a Hewitt study, but pay isn't the reason.

Both the WorldatWork and Hewitt studies make it clear that visible, trusted and communicative leadership are critical to maintaining high levels of engagement. While the focus of each study were somewhat different, neither study posits pay as a driving factor in employee commitment and engagement.

While pay is, and remains, a critical element in the attraction, retention and satisfaction of the workforce, it is far from the most critical factors in determining overall happiness, commitment and engagement of the workforce. If you've even worked in a "toxic" work environment for an employer that paid well, you'll easily relate.

Pay competitively and treat your workforce well. It's cheaper and more effective than trying to overcome poor people management with extra pay dollars.

Doug Sayed, SPHR, CCP, is principal with Applied HR Strategies, a Seattle-area compensation consultancy, and an instructor, periodic author and publications reviewer for WorldatWork. He is the lead author of the StrategicPay Series Base Pay Toolkit.

As I start to write, I'm humming the Beatles tune of a similar title in my head. Their lyrics were  poetic and prophetic, even when it comes to matters of the heart at work, because money can't buy workplace love.

That's not to say that many a manager and employer haven't tried to use money to counter other deficiencies in treating/managing/leading/recognizing/rewarding their workforces, but it rarely works as intended. In today's world of commonplace mass layoffs, "doing more with less" and "working smarter, not harder" a few extra bucks isn't going to buy a Whole Lotta Love (I'm starting to hear another classic coming on..., but I digress).

Don't get me wrong; people work for money, and so market competitiveness, especially for base pay, is critical to the ubiquitous "attract, motivate and retain" objective we often hear mentioned. (Base pay is mostly for the "attract" part, and to a slightly lesser degree the "retain" element; not so much for the "motivate" part, but that's a post for another day). Because cash compensation is so important, it's critical to make sure the cash elements of your rewards programs are competitive with the relevant external labor markets in which you compete for talent.

But if you think you can buy workplace love, engagement, loyalty, or commitment, you're mostly dead wrong. Some people can be bought psychologically, but not that many (excluding politicians, of course!).

Substantial research confirms the disconnect between money and commitment or engagement at work. For instance, a recent study conducted by WorldatWork (membership may be required to view study results), in collaboration with the  Hay Group and others, confirms that indeed, non-pay elements of the total work experience are the key drivers of employee commitment and engagement.

The study, a survey of hundreds of compensation/rewards professionals, reports that organizations realized better outcomes in their efforts to "engage" employees if non-HR employees were also involved in the development of reward and engagement efforts.  Regarding key reward elements, "non-financial rewards, as opposed to financial rewards, are viewed as having more impact on employee engagement," says Tom McMullen of the Hay Group.  He goes onto say that "quality of work, career development, organizational climate, and work-life balance have a greater perceived impact on employee engagement than financial rewards." 

The perceived quality of managers and top leaders are also more important than financial rewards on impacting engagement.  "Quality of leadership has a profound impact on employee engagement and motivation" says Paul Rowson of WorldatWork, who also says that "organizations must think it terms of total rewards and not just financial rewards if they are to enhance employee involvement, commitment, job satisfaction - and performance."

Assuming your compensation levels are already competitive, the next time a weak manager seeks approval to use increased pay to enhance retention or morale, maybe we should be thinking about fixing the manager, rather than throwing money down the drain of worker discontent, especially with their management and/or leadership.

You may have heard the phrase that employees join companies, but they leave their managers - this is so true (just think about the last really bad manager you worked for).  Of course, some will leave for more money or opportunity elsewhere, for sure, but when people are poorly treated and/or managed, virtually all of them want to leave!

Once your workforce is paid fully competitively, additional reward dollars would be better spent on programs and actions that enhance culture, employee commitment and engagement, and ones that strengthen your management and leadership.

Don't try to buy employee love and loyalty; earn it instead.  It's cheaper, and more effective.

Doug Sayed is principal and founder of Applied HR Strategies, Inc., a Seattle-based compensation consultancy, and developer of the StrategicPay Series, a series of hands on, "do it yourself" guides for developing your own strategic compensation programs.

Now that the economy and labor market has started to (weakly) recover, does this mean that it's back to business as usual for rewards professionals?  The short answer, in my opinion, is no.

Not that we won't be performing many of the same activities that we have for years, but ongoing trends, along with the devastating impact of the 2008-2009 recession, have combined to create the perfect storm for potential change in the ways we look at base pay management, variable pay, and qualitative or non-financial rewards.

Just as many economists feel the recession has led to some fundamental changes in consumer behavior, I believe that some fundamental changes in in the way that various forms of rewards are utilized are already underway.  For instance, a report done by Hewitt last year, predicted that over the next decade variable pay budgets will continue to rise (to 16% of payroll, up from about 12% today and half that back in the early 90s), while base pay increase or "merit" budgets will continue downward, from close to 4% prior to the recession, to about 2.5% to 3.0% today, and to about 2% in 2020. While no one knows if these specific numbers will hold up 10 years out, I believe they have nailed the general trends with their predictions.

Over the next decade employers will continue to endure painful benefits costs increases (healthcare reform or not, medical costs are rising out of control), crowding out potential spending on other rewards programs, especially for base pay increases.

Base pay is destined to be a serious pinch point for both employers and employees, as companies strive to keep fixed cost increases moderate, while employees lament the lack of pay growth. Between the long-term shift towards more variable pay, the cost squeeze created by ever-increasing healthcare costs, and the weak labor market (and predicted to be weak for some time), base pay has no where to go except barely up. Some pundits also see a change coming in the way merit pay is doled out.  For instance, see "Paying it Forward:Ideas Beyond the Traditional Merit Matrix" by Ann Bares via the Compensation Cafe.

To augment the lack of excitement at the base pay level, many savvy employers are paying more attention to qualitative rewards, i.e., rewards that are not based on monetary payouts, but more focused on addressing other "higher order" needs (in Maslow's Hierarchy of Needs), such as building a culture of appreciation and recognition, offering greater opportunities for training and skill development, offering greater work schedule flexibility and other work-life fit options, and in enhancing the overall culture of the organization in ways that are more employee friendly.

There are not going to be a lot of fixed dollars to throw around in the next few years, and so it will be incumbent on organizations and rewards professionals to make better and more creative uses of the various rewards alternatives available to them.  Motivating and retaining workers has never been "just about the money," but that concept will prove to be even more relevant in the 2010s.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy, and lead author of the StrategicPay Series Base Pay Toolkit, a guide for helping non-compensation experts to develop their own strategic compensation programs.  Doug is a Certified Compensation Professional (CCP) with over 25 years of HR and compensation experience, and a Master's degree in HR management from The Ohio State University.