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.

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.

Thank you to my "guest posters" for sitting in while I was away!  I'm back, but will have a few more guest posts, because so many colleagues were nice enough to contribute.  Getting back to my own work though, temporarily at least, the following post is a from my recent post at the Compensation Cafe.

The days of near-guaranteed base pay increases and growing employer contributions to ever-increasing benefits costs are slowly (but surely) dwindling.

No, base pay isn't going away, nor are periodic pay increases, but the battle against the growth in fixed compensation costs (base pay, health care costs, etc.) is gaining strength, even as the economic recovery starts to take hold.

Most employers are willing to pay out increased compensation, but today much of those pay increase budget dollars are going into variable pay, which typically flexes with organizational performance and ability to pay. The trend toward increased variable pay has been going on for two decades, but it seems to have hit a "tipping point" in recent years, as organizations struggle to absorb a never-ending battle with health care cost increases (crowding out merit budgets in the process), while trying to get more "bang for their buck" with their compensation dollars.

While organizations try to keep a lid on fixed costs, more enlightened employers realize that there's more to the "attract, motivate and retain" equation than just base pay and benefit dollars. But before going on, let's look at some general reward trends over the last few decades, and how we ended up where we are at today.

• The 1970's and 1980's: plain-vanilla base pay and benefits; defined benefit (DB) pension plans were common in larger, manufacturing and/or unionized organizations. Variable pay is confined largely to executives and sometimes middle management.
• The 1990's: many employers add variable pay (or push variable pay into lower levels of the organization) and other reward elements into the mix, such as stock option programs. Many employers freeze or eliminate DB pension programs and retiree medical as just too costly to maintain. Health care cost sharing is increasingly pushed down to employees. The 401(K) is the new pension program.
• The 2000's: a greater movement towards "total rewards," including variable pay for the masses and a greater recognition of the need to pay more attention to qualitative vs. purely quantitative (dollar dominated) rewards. Employers continue efforts to contain fixed costs, especially in the form of sharing increased health care costs with the employee base.
• The 2010's: as we enter a new decade, we see a greater focus on comprehensive or "holistic" rewards, including a movement away from purely quantitative rewards to qualitative and work-life rewards. Qualitative rewards include career/job growth and development opportunities, increased focus on organization culture and communication, work flexibility options, work-life "fit"options, and  creating a culture of appreciation/recognition.

Decades ago, Herzberg's work on motivation and job enrichment theorized that that pay is a more of a "satisfier" (it can meet basic needs and satisfy, but cannot make employees "happy" about their employment).  Confirming this, many studies have shown that pay is generally not the reason employees leave organizations (unless pay is noticeably below what's available in the relevant labor market); it was considered more of a "hygiene" (in Herzberg's terminology) or satisfaction factor. I believe this is an accurate characterization of base pay's role in job satisfaction, even today.

In reality, it's how managers treat and manage their staff, and how leaders lead their organizations that has the greatest impact on retention, job satisfaction and the propensity to turnover.  This is where rewards are headed; not just dollars (there are so few to spread around these days), but with qualitative or psychological rewards that can help to engage and retain employees (or to dis-engage and repel workers when not provided, or provided poorly or disingenuously).

Qualitative or psychological rewards focus more on genuine management/leadership, honest communication and regard for employees; building a culture of respect and appreciation, providing honest and constructive performance feedback, offering career and professional development opportunities, offering work flexibility and work-life balance fit options.

With the limited merit budgets of today and (predicted) for the future, there is just not enough "oomph" in the dollars that employers can offer to assist too much with the critical ideal of "attract, motivate and retain." Variable pay will help, but most of the rest will have to come from other types of rewards.

It's time to start thinking beyond dollars...


Doug Sayed is principal at Applied HR Strategies, a Seattle-area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, and hands-on, "do-it-yourself" (DIY) guide to developing a strategic market-based compensation program, complete with dozens of pre-built tools and templates, ready for use.