Fighting Fixed Costs, Rewards Becoming More Variable and Qualitative

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 upper-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 it is 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 engage and retain employees (or 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.

Comments

[JD]

Good point, Doug, and all the more reason to read and consider the ideas in Dan Pink's Drive.

We have to start honing in on the intrinsic factors that motivate people, and I hope that compensation professionals have the background in organizational psychology and interest to contribute, otherwise some will be left behind.

Based on the reactions here and on allied blogs to Pink's book from others, some people seem to be in denial as to the importance of this development and resent the fact that financial incentives will have to share the limelight.

[Ann Bares]

Nicely done, Doug (as always)! And I wanted to take the opportunity to respond to JD on behalf of the "others"/allied bloggers, a group in which I suspect I have been included. JD, if you really read what I (and "others") are saying in response to Dan Pink and the "Drive" phenomenon, you would realize that we are, in fact, arguing for balance. (In fact, I just did a Workforce webinar where I spent most of the presentation arguing for expanding our definition of rewards to intrinsic as well as extrinsic rewards.) We are simply saying that it cannot be one or the other, that we can't - as many interpret Pink to be suggesting - simply throw out financial rewards and replace them with only intrinsic ones. Rather than advocating either extreme, we are simply suggesting that a successful reward package will include a thoughtful, well-considered combination of these elements.

Thanks for the discussion (and the opportunity to respond)! Just the kind of caffeinated conversation we like to have at the Cafe!

[JD]

I'm just thankful that Doug and Laura have brought some balance to the discussion of rewards by noting the importance of the intrinsic ones. I'm glad that there are some objective people who will tell it like it is in the anti-Dan Pink environment that I have sensed.

For those who are interested in what Pink says about traditional reward system, I refer them to pages 170-173. It is not at all like the reality some have painted.

[Ann Bares]

JD - you're right and it is important to strike a tone of balance. Doug and Laura have done impressive jobs with this in their recent posts. I think that some (but maybe not all) of what seems to anti-Pink hysteria is a group of us reacting to the conclusion many draw from his book that ALL extrinsic rewards are necessarily problematic - our sense that some are swinging the pendulum way off in one direction and our attempts to push it back to the center.

Thanks for your comments here - and for helping clear the fog and emotion surrounding this debate.

Doug - sorry to co-opt your comment stream.... Ann :)

[Doug Sayed]

Thank you for all of your comments. My comments are/were totally mutually exclusive from Dan Pink's work (I never even thought about his work or book as I drafted this post).

The ideas presented here do argue for a using broader set of rewards than just various forms of cash or in-kind rewards, and that "qualitative" rewards are at least part of the future of rewards, in my opinion.