An article was published last week with data from Aon Hewitt and Towers Watson that showed the annual pay raise is essentially dead (and in Towers Watson’s case, bonus pools will also be underfunded). The data apparently shows that we will deliver base pay as a flat amount going forward. Increases in pay will come from incentive plans, if they are funded. Let’s cast a fond farewell to a method of pay that has existed for as long as people have been paid.
Thankfully, we live in America the land of the free and the home of zombies, werewolves, vampires and tons of other things that come back from the dead! On top of that, Halloween is in just a couple weeks, so we can depend on being frightened and then fed something sweet.
In a world of no raises, creating a competitive pay program should be insanely easy. All you have to do is start giving people raises. Don’t follow the data. Follow your brain. We are not zombies who must blindly follow each other.
Don’t make pay increases something that only occur on the occasional full moon. Create a program that does for your employees what should be done. Have a pay philosophy that drives your unique value proposition instead of one that is driven by the uninspiring greyness of “everyone does it.”
Don’t charm your recruits and employees with fantastical stories then drain them of their life force when they sign on. Use everyone else’s lack of imagination and foresight to your advantage. Give raises when others don’t and crow about it from the top if the nearest tree silhouetted in the moonlight.
Unfortunately, we live in a country where many people will read about the death of annual raises then decide to make it come true. Heck, we have multiple ghost and Bigfoot hunter television shows! Many will believe almost anything. Don't be fooled.
Too often we, or our executive bosses, jump on data like this as a way to justify limiting pay even when productivity or achievements are growing. You should instead use the “middle’s” lack of imagination or motivation as your competitive advantage. Apparently over the next year or two all you need to do is give your people basic raises to crush the competition. Imagine if you gave reasonable (or even good) raises and did ALL of the things that you know are important (communicate, motivate, manage, etc.) It looks like you may end up being unstoppable while attracting and retaining the people you really want.
Of course, there is always the possibility that the predictions made from the data are simply wrong and you should continue to follow your own philosophy and structure. What do you think? Are annual raises dead or is the data dead wrong?
Dan Walter is the President and CEO of Performensation and is committed to aligning pay with company strategy and culture. Grab a copy of Dan’s new comprehensive issue brief,Performance-Base Equity Compensation. Dan has also contributed to “Everything You Do in COMPENSATION IS COMMUNICATION”, with Comp Café writers, Ann Bares and Margaret O’Hanlon. And if you’re still not sick of Dan, he has co-authored “The Decision Makers Guide to Equity Compensation”and “Equity Alternatives.” Connect with Dan on LinkedIn. Or, follow him on Twitter at @Performensation and @SayOnPay.
It's just another cycle repeating, Dan. Back in The Day before double-digit inflation (now just another myth to relative youngsters), annual increases were indeed the exception and never the rule except in labor contracts. Merit increase grids then featured 18-month and 2-year cells. Yeah, really.
Incomplete data will always mislead but at best merely supply context for decisions. Projections only reflect their assumptions, and only the mediocre and unambitious want to be "average" or "normal."
Posted by: E. James (Jim) Brennan | 10/13/2015 at 02:10 PM
The author of that article either didn't understand the data, or (and I think more likely) chose to present it in a somewhat misleading way to grab attention.
Regarding salary increases it states:
"Don't plan to buy that new car just yet, however. Both companies agree on one thing: There will be no raises this year, or next, or . . . maybe not for a long time. "Base salary increases are flat. We don't see the prospect of that changing much at all in the next several years," said Ken Abosch, who studies compensation issues for Aon Hewitt."
They did not say "no raises", they said that increases are "flat" - as in hanging around the 3% mark they have been at recently.
From Aon Hewitt press release:
"Aon Hewitt's survey projects that pay increases will continue to modestly increase in 2016. Pay increases for salaried exempt employees are expected to be 3.0 percent up from 2.9 percent in 2015, but nearly a full percentage point lower than what was observed two decades ago. "The modest increases we've seen over the past 20 years are an indication that employers have changed their compensation strategies for good, and we shouldn't expect to see salary increases revert back to 4 percent or higher levels that were commonplace in the past," said Abosch."
http://ir.aon.com/files/doc_news/US-Organizations-Report-Highest-Compensation-Spend-in-39-Years.pdf
In regard to bonus funding the article starts with:
"Already have plans to spend that big end-of-year bonus on something special? You might want to stop dreaming. While you're at it, you might want to stop planning, too"
The author bases that on the fact that a Towers Watson survey says bonus pools will be underfunded. But if you look at the actual TW press release it states:
"The Towers Watson Talent Management and Rewards Pulse Survey found that U.S. companies’ average projected bonus funding for current-year performance is 89% of target. Last year, these same organizations funded their plans at 93% of target level. Since 2005, U.S. companies have fully funded their bonus pools only twice."
https://www.towerswatson.com/en/Press/2015/09/us-employers-once-again-not-planning-to-fully-fund-annual-bonuses
Not nearly as alarming as the article tries to make it sound.
Posted by: Drew | 10/13/2015 at 04:59 PM
Thanks Jim. We can always depend on you to fill us in on the history of comp. Everything new is old again....
Posted by: Dan Walter | 10/14/2015 at 12:45 PM
Drew,
Thanks for your great and very complete comment. It's nearly an article by itself! While I agree it is a misleading way to grab attention, sadly many people only read headlines. And, virtually no one makes the effort to read the supporting articles as you have.
The proposition that annual raises are dead is somewhat ridiculous. But, this article has really resonated in the comp and HR world. I think that's mainly because it starts by amplifying a message than many have already decided is true.
As for funding of bonus pools, perhaps most companies are doing it wrong. Perhaps how these pools are conceived and actualized needs to be better communicated. "Target" is the line item most used to discuss "budget". But Target is also supposed to be a stretch, not a guarantee.
It makes sense that bonus pools are general "underfunded" if completely funded means slight over performance.
Target is a term that is often misunderstood, even outside of comp. The bullseye on any shooting target is the intent, but even the best occasionally miss it.
Oh well. Back to work.
Posted by: Dan Walter | 10/14/2015 at 12:52 PM
Agree Dan,
I think those are good points (along with the good points in the original post)
I only took the time to dig in as on the surface the article seemed to contradict some of the other information I have been seeing lately (i.e. consistent 3% increase budgets) so I was curious what the original data sources said. I wouldn't expect every comp person reading it to dig in that much, let alone the average reader...
Posted by: Drew | 10/14/2015 at 04:56 PM