Your Most Expensive Reward

What is it?  It's base pay.  That's right, base salaries are your most expensive reward.

Fact:  Over a ten year earning period, it takes about five dollars of variable pay or bonus money to deliver the same financial impact of a one dollar salary increase. 

Kind of takes your breath away, doesn't it?

What does this mean for those of us charged with managing compensation?  It doesn't mean that we're going to stop increasing salaries.  As the labor market recovers (which we sure hope it will do at some point), demand will likely drive up base pay levels. Probably not in an even and linear way, as pay for high demand jobs and skills will likely leapfrog over their counterparts.  But in a way we'll need to respond to - at least to some extent.

It does mean that salaries have become a uniquely high-cost, long-term element of your reward program in a world where the long-term is impossible to foresee and control.  This being the case, we must be increasingly careful about using them solely to reward short-term, rearview mirror accomplishments and focus on how to invest these precious dollars in a way that creates business value and competitive advantage.  If salary dollars are a fixed long-term investment for the organization, we must figure out how to deliver and manage them in a way that generates positive returns over that timeframe.

It starts - I think - with deeply understanding the forces and possibilities that our organizations are facing and discerning what they will demand of us talent-wise.  What capabilities and skills, imperative to the organization's future, should we be using our salary dollars to grow?  How can we apply our salary increase budgets - or at least some portion of them - to begin crafting the workforce we will need in the future?

Who has the answers? Let's hear from you!

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School and is a bookhound and aspiring cook in her spare time.  Follow her on Twitter at @annbares.

Creative Commons image "Money" by AMagill

Comments

[Jacque Vilet]

Great thought-provoker. IMHO I think top management will try to keep fixed costs of whole TR package as low as possible at least for non-critical talent. Sort of a "safety net". I think variable pay and especially recognition and "one off" rewards for performance will take on greater and greater importance and will be used to a much greater extent. My 2 cents.

[Ann Bares]

Jacque:

That's been my thought for some time as well - it will be interesting to see where this takes us! Thanks for the comment!