Salary Increases Going to Top Performers

Thursday, August 05, 2010

On July 21, 2010 WorldatWork, the global human resources association focused on compensation, benefits, work-life, and total rewards, released its "37th Annual Salary Budget Survey Analyzes Employer Pay Strategies" report. The annual survey is the largest of its type and pulls from over 2,400 respondents covering some 15.5 million US employees.

As expected and as has been the trend for several years, the average salary increase has generally ranged between the mid 2% to the upper 3%. However, employee performance does seem to matter, as the Survey reports that higher performers are receiving over 50% more than lower and middle performers. While a 50% differential sounds great for top performers, when taken in terms of absolute values, 3.5% vs. 2.5% is still a very thin margin.

The survey also reported that one third of respondents indicated that they have an independent budget for promotional increases. These promotional increases have the ability to yield from 7% to 8% for the employee’s compensation. In addition, employers have increasingly been utilizing variable pay practices to supplant some of their traditional compensation methods of the past. While variable pay in the form of bonuses and commissions have been used for decades in roles such as sales, they are finding their way into non-managerial and staff support roles.

SHRM, the Society for Human Resource Management reported on March 1, 2010, that variable pay, e.g., “Companies Worldwide Rewarding Performance with Variable Pay” as a means of rewarding employee performance. SHRM quoted from the Hewitt Associates worldwide survey of over 6,000 large organizations in 46 countries who were queried about their pay practices. The survey indicated that roughly 80% of employers globally are using variable pay programs to recognize employee performance. What makes variable pay different from bonuses, commissions or other pay practices is that conditions around variable pay payouts change every year. While on the surface, this does not sound any different that any sales commission scheme, a degree of risk is introduced into variable pay plans.

Generally, employee variable compensation is composed a fixed pay and variable pay portion in some relative ratio, i.e., 90/10, 80/20, 75/25. The actual ratio is determined by a number of factors including, the position, industry, earnings opportunities, and employee’s control over the earnings environment, … etc. The variable portion is placed “at risk” relative to the performance of both the employee and the organization. The organization could be the employee’s entire employer, department, location, facility, team or some other “unit”. When the variable plan is designed, the employee’s fixed portion is not set to equal the market rate for the employee’s position. Rather it is backed down to say 90%, 80%, or even 75% of the market rate, the variable portion is designed to allow the employee to fill the “gap” to 100% and on the upside, even reach 110% or 125% of the position's market rate.

Numerous articles and books are available on variable pay iincluding those from WorldatWork.
Google Books also has an outstanding selection of books on variable pay, including variable pay plan in the international community.