Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

Note: this is an updated version of my recent Compensation Cafe Post.

Amid all of the talk about motivation and incentives in the past few months, as HR and compensation influencers, we need pay attention to what we're paying for, why we are paying it (are we getting what we think we're paying for?), and in communicating this information throughout our organizations.

In their classic book "Pay People Right," Zingheim and Schuster argue that base pay should be pay for ongoing value, not for results. Each person brings to work their unique set of education/training, skills, experiences and talents, and base pay is to compensate for use the of skills and abilities that employees bring to work every day.

Zingheim and Schuster go on to say that variable pay (typically in the form of short-term cash incentives) should be used as pay for results. Using their model, we can use base pay to pay for what I call the employee's "toolkit" (all those skills, abilities, etc.), while reserving variable pay for the actual results achieved via a combination of the employee's abilities and efforts.

Although employee efforts are a key component of achieving desired outcomes, efforts do not always equal results, and so we should separate them from each other in terms of pay and rewards.

Efforts are critical though, especially those "discretionary efforts" that we as HR and rewards professionals seek out, and thus, while we probably shouldn't pay for them per se, we certainly can recognize, applaud and occasionally even celebrate these "above and beyond" efforts.

In the book "17 Rules for Successful Companies Use to Attract and Keep Top Talent" author David Russo states ("Rule #6") "applaud effort; reward contribution" and I couldn't agree more.  Efforts are critical, and worthy of recognition and applause, but not of pay per se.

If we pay for effort alone, in the absence of tangible results, we run the risk of creating rewards confusion (especially for those who actually achieve intended results) and possibly of mis-placed rewards expectations and/or feelings of entitlement ("I busted my butt on that project...").

Of course, we need to be clear and transparent about what we pay for and why; what base pay is for, and what variable pay/incentives reward. If we don't do that, many of our pay related programmatic efforts will be waisted, because people will not understand what they are paid for and how they can improve their own personal rewards system.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy and author of the StrategicPay Series Base Pay Toolkit, a 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.

WorldatWork Survey, January Update: Pay Cuts Not as Prevalent as Pay Freezes in 2009
 
January 19, 2010 – Washington, D.C. – In response to the sluggish economy, many corporations either froze or cut pay in 2009. Even as the economy starts showing signs of life, a majority plan to remain conservative when it comes to pay practices in 2010. The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update (fielded in October 2009), found that 52% of U.S. employers froze pay for some or all employees in the 2009 recession, while 13% cut pay.
 
Will employees see their pay restored in 2010? At least 22% of organizations that froze pay in 2009 are planning to prolong the freeze into 2010, while 54% plan to resume normal pay activities this year. More than a third said they were in a recession (in October) and were not in a position to unfreeze pay.

 Of those organizations that cut pay, 37% said they remained in a recession and were not yet considering recovery actions; 29% planned to restore pay in full, while 15% said the pay cuts were permanent.
 
"Employers are taking a 'wait and see' stance when it comes to returning to normal pay practice," said Jim Stoeckmann, CCP, compensation practice leader at WorldatWork. "There are risks both ways. Moving too fast in restoring salaries and merit budgets leaves employers vulnerable if the recovery fails to materialize. Moving too slowly creates the risk of turnover as employees look for a better opportunity with another company. Even with jobs scarce, there are always opportunities for employees with the right skill set."
 
As salary budgets remain tight and employee satisfaction low, organizations are turning to other ways to motivate and reward employees. Employers are focused on providing or enhancing career development opportunities (33%), non-cash rewards and recognition (28%), leadership training on employee motivation (21%), flexibility options (20%), monetary rewards for high performers (19%), and monetary rewards for mission-critical talent (15%).
 
"With lower than normal employee satisfaction levels, it is crucial for employers to center the employee value proposition on the entire total rewards package," said Alison Avalos, research manager for WorldatWork. "Employers can cultivate employee loyalty by highlighting non-cash rewards, particularly for key employees. These programs validate the employee's time, effort and talent, even in the absence of salary increases."
 
About the Survey:
The WorldatWork 2009-10 Salary Budget Survey, January 2010 Update was fielded in October 2009. Survey respondents are WorldatWork members employed in the HR, compensation and benefits departments of mostly large U.S. companies. N = 875.

Good riddance to 2009! It's onto 2010 and beyond...

For many of us, the second half of 2008 and most of 2009 was like a bad bad dream that was all too real: massive layoffs/job losses (over 6 million) and skimpy (or no) pay increases for those that survived the crunch; terrible business conditions and plummeting sales and profits (if you were lucky enough to have profits!); tapped out consumers and losses on real estate and retirement holdings, to name a just few fond memories of the past 18 months.

Indeed, let's move on. Here's a brief summary of the current outlook for 2010 for us HR and compensation professionals, with links to additional information.

Employment and Hiring

The most recent national employment data is encouraging, and indicates we are in a bottoming phase, if not getting ready for a slight rebound in early 2010 (don't expect a barn-burner turnaround anytime soon).  Job losses in November 2009 were only 11,000 nationally, which is by far the lowest total in well over a year. The U.S. unemployment rate dropped from 10.2% to 10.0%, and 36 states reported slight to moderate drops in their unemployment rates for November as well.

The recently released Manpower Employment Outlook Survey also reveals some encouraging trends and data.  While 12% of employers expect a decrease in employment in the 1st quarter of 2010, an equal percentage expect an increase.  While this may seem less than inspiring news, when the data is seasonally adjusted for typical seasonal employment patterns, there is a net 6% increase in expected hiring over historical employment trends for the 1st quarter.

When compared to a year ago, employers in the Western U.S. are the most confident, but all areas show improved employment outlooks. Using the seasonally adjusted data, all regions anticipate moderate quarter-over-quarter increases in employment levels.

Bottom line, the outlook is from flat to improving in the first quarter, depending on who you ask, but compared to the past 18 months, this is a huge improvement, and should provide encouragement to job seekers and businesses alike.

For more information on the labor market, see my recent post at the Compensation Cafe.

Base Pay Compensation Trends

While merit budgets for 2010 will be near to historical lows (2.5% to 3.0% in most studies we've reviewed), at least there will be pay increase budgets for the vast majority of employers, unlike late in 2008 and in 2009. (See earlier posts from this blog for more specific information).

2009 merit budgets (most commonly implemented in late 2008 or in the first quarter of 2009) were slashed or eliminated by large numbers of employers.  Depending on the study, 25% or more of employers had 0% pay increase budgets for 2009, and many actually cut pay.  Well over three-quarters of all employers reduced their original planned merit budgets for 2009, but we do not think we will see anything close this type of wholesale budget-slashing in 2010.  Recently completed studies (Mercer, Hewitt, Culpepper, etc.) suggest only about 10% of employers are planning 0% budgets or pay reductions for 2010, and we expect these percentages to drop further, assuming the nascent recovery continues.

Incentive Compensation Trends

Incentive compensation/variable pay budgets (but not necessarily payouts) are holding strong, despite the weak economy and labor markets.  Variable pay is getting more and more ingrained into the foundation of compensation plans in the U.S. (and internationally too, just more  slowly than here). Hewitt, who does a major survey of variable pay trends each year, reports that variable pay budgets dropped a very modest 0.2% (from 12% of payroll to 11.8%) in their latest research on the topic.

Despite this minor drop, the long-term trend toward increased variable pay budgets remains intact.

Executive Compensation in 2010

Executive compensation is the fastest moving target in the world of compensation.  From rapidly evolving reporting and disclosure requirements, to increased government intervention in executive pay, to shareholder activism concerning perceived excesses in executive compensation, it's been a wild past few years for anyone who follows this topic, and the pace of change isn't likely to slow down anytime soon.

The changes are so numerous (and in some instance convoluted) that we won't even attempt to describe them here, but here are a few thoughts as to where we are likely heading:

• New and increased executive compensation disclosure requirements for public companies (see "A Holiday Present from the SEC - New Proxy Disclosure Rules!"  from our friend William Parsons at CompWiser).
• Greater intervention/intrusion by the Federal Government into the executive compensation arena in general (already a very heavily regulated area).
• A greater focus on pay/performance linkages and increased transparency for executive compensation plans.
• An expectaion from various stakeholders (shareholders, unions, shareholder advisory groups, etc.) to see reduced excesses in executive compensation (expensive perquisites, tax gross-ups, huge "parachute" payouts, etc.).  This is already starting to happen, but this one has a ways to go still.

Longer-Term Compensation and Related Trends

• Continued historically low merit budgets. Don't expect a surge back to more normalized merit budgets, even after the labor market gets back to a more healthy supply/demand balance. Some are predicting a long period of historically low merit budgets, and we largely agree, as we see a greater willingness of companies to invest in variable pay than increasing their fixed costs via base pay increases.
• An on-going upward bias towards increasing variable pay budgets, in lieu of larger merit budget pools.
• Pay for performance (real pay for performance) will continue to increase in prevalence and intensity, and will become the the new "merit pay."  Only this time, it will be delivered via various incentive vehicles, rather than via a slight up-tick the annual base pay increase. Follow our friend Paul Hebert at Incentive Intelligence for daily lessons on all things incentive and motivation related.
• Taking better care of people psychologically (not just financially) will become more in vogue, and for good reason: most people desire more feedback and appreciation, and respond positively to it. Increased communication and various forms of recognition can help to build and maintain a healthier workplace. To get you thinking more about recognition and related concepts, see "12 Gifts for Cash-Short, Recession-Weary Workplaces" and "All I Want for Christmas" plus two recent recognition postings here at the StrategicPay Blog from our friend Theresa Chambers at Recognition Works.

Well that's about it for now.  Hopefully you haven't fallen asleep while reading this. We at the StrategicPay Series will continue to keep you informed of the latest information, thoughts and research in 2010.

Until then, here is wishing everyone a happy and safe New Years, and great start to 2010!!

As a compensation professional who tries his best to stay up on what's happening on the business, HR and compensation world, I must say that I'm astonished at how much information and advice is available, especially on-line.  There is an amazing array of information for HR and compensation professionals on the web, but but it requires a fair amount of sifting through the mass of information to find the really valuable pieces of information out there.

One blog posting I read this morning while catching up on the latest happenings really got me going. The post, "Six Pay Raise Alternatives" presents some good issues and ideas to think about, but also floats a fair amount of questionable ideas and advice.  Briefly paraphrasing, here are six pay raise alternatives that were suggested:

1. Pass into your employees some of the perks you as a manager receive. The primary examples used were sporting and concert tickets, such as "a $150 ticket to a Billy Joel concert goes a long way, and provides maximum ROI." First of all, while this would be a nice firm of recognition, it's not a credible pay raise alternative.  Second, if the company is following the IRS code (always a good idea!), this example would create a taxable event for the employee, but I digress...
2. Treat your employee to a luxury meal. Certainly a nice gesture, and one that many employees would appreciate, but this is another form of recognition that should be an ongoing part of being a good manager, by recognizing and expressing appreciation for your employees and their performance. 
3. "Give cell phone breaks." Another nice gesture, but something employers should already be assisting with or providing for employees who are expected to be available or reachable most hours of the day.  This is a mild perk/benefit, but certainly not something virtually any employee would consider to an alternative or substitute for a merit-based pay increase, even a small one (which most of them are today).
4. "Award your employee a new title."  Yikes!  As compensation advisor that spends a good chunk of his time trying to untangle the messes and expectations that lie behind the indiscriminate awarding of job titles, this is really unsound advice (and I'm struggling to stay diplomatic).  Anyone who tells you that job titles are "free" or don't change expecations doesn't understand what they are talking about, because inflated or "vanity" titles almost inexorably lead to internal equity concerns, revised and/or unrealistic pay expectations, etc.
5. "Offer flexible schedule or telecommuting."  Yea, something we can agree on, but not really a pay increase alternative, although this would be considered is a valuable benefit to some.  Many employees appreciate the opportunity to save on commuting time and related time and cost elements of going into the office every day.  This benefit should be reserved for highly motivated self-starters that don't need a lot of prodding or supervision (in other words, the employees you should fight to give a raise to, and to ensure their on-going pay competitiveness).
6. Let your employees come up with their own perk, and if it's a viable option, implement it immediately.  This option has appeal on it's face, but be aware of potential perceptions of internal equity issues or favoritism.  I'm not opposed to individualized rewards and recognition, but most employees are are keenly aware of what they observe around them, and it they sniff "unearned" or obviously inequitable rewards, you as a manger will will suffer from other morale and internal equity concerns that can challenge your credibility and effectiveness.

There are actually some really good nuggets embedded in here: recognition is a good thing, but it's not something that should be done only on special occasions.  It's a part of being a good manager and component of being an employer of choice. Other nuggets: people really appreciate being appreciated, and we recommend showing appreciation as a habit, and not something done on an infrequent or special-occasion basis.

In short, there is a lot of information and advice out there, but be discriminating and choose carefully, because when it comes to base pay and other forms of rewards and recognition, there can be negative or unintended consequences of poorly designed efforts and programs.

For instance, if you're looking to implement a new recognition or incentive program, or a strategy to address pay issues while keeping down fixed cost increases, talk with a specialist or at least someone who truly understands the issues, alternatives and consequences of of various strategies and approaches.  Too much is at stake to to take the chance of implementing poorly-designed programs or un-vetted ideas without considering the consequences.

OK, I'm getting off the soapbox!

Some of my fellow bloggers at the Compensation Cafe' have been writing recently on how to address the issue of today's small merit budgets with employees and managers.  Here are a few links to help you with these issues:

• 10 Things Your Managers Must Tell Employees about Your Teeny, Tiny Merit Budget by Margaret O'Hanlon
• 10 Tools for Communicating a Teeny, Tiny Merit Increase Budget, by Margaret O'Hanlon
• Despite Pay Dissatisfaction, Most Employees Expect to Maintain Current Level of Benefits in 2010, by Becky Regan
• Show Your Creativity as a Rewards Professional, by Doug Sayed

In addition, I would add a few other key thoughts, such as:

• Job Titles: Are They Really Free? by Ann Bares
• Food for Thought: Pay for Performance Obsolete?, by Darcy Dees
• Agility. The New Reward Watchword, by Ann Bares via Compensation Force

So, while there may be a shortage of funds available for organizations to distribute, there is no shortage of ideas and creative strategies for addressing today's challenges.  If there was ever a time to show your worth as an HR and/or compensation professional, now would be it!

The future isn't looking too good for the typical wage earner in America these days. Not surprisingly, wage growth is quite slow right now, but there is also no foreseeable impetus to increase that growth any time soon, unless you're lucky enough to be in a few selected high demand roles (such as for skilled health-care workers and selected technical professionals).

Not only is the labor market in the worst shape in decades, we likely haven't hit bottom yet.  In addition, nearly all economists are predicting a painfully slow jobs recovery over the next few years.  Of the millions of jobs lost in this recession, the concern among many labor market pundits is that a good chunk of these jobs may never come back (i.e., many of the manufacturing job losses), and of the ones that do, the recovery will be several years in the making.

Back to wage growth though, here's the current situation relative to the pre-recession period: in the first half of 2007, wages were growing at a healthy 3.7% annualized rate. In the first half of 2009, wages increased at a 1.3% annualized rate, and that may well go down as the labor market continues to deteriorate (labor market conditions generally lag overall economic trends, so even though we've hit bottom overall, according to most economists, the labor market probably hasn't yet).

The current (August) national unemployment is at 9.7%, and is expected to bottom in the 10%+ range sometime early next year.  That's the good news. IHS Global Insight is predicting that in 2014, the unemployment rate will average 7.6%, which is still well above the unemployment rate before the recession started in late 2007.  The predicted molasses-paced recovery will have a major impact on wage growth in the U.S. for the next few years at the least.

Labor market dynamics are a complex brew of many factors, but at its core is the same "supply and demand" that you learned in Econ 101. With labor current market supply quite high and demand very low (and expected to stay weak for the next few years, due to the slow economic growth being projected), the the case for a strong rebound in wages is not in the cards, barring a much more robust recovery than expected.

It is likely that wage growth could be stuck in the 1.5% to 2.5% range for years, or roughly one-half to two-thirds of historical wage growth.

If this predicted scenario plays out, the implications for the typical American wage earner will be profound. It will also have a large impact on employers, who rely on economic growth to fund their pay-for-performance programs.  For some ideas on how to address these issues, see fellow Compensation Cafe' blogger Margaret O'Hanlon's recent post on dealing with "tiny" merit budgets, and my earlier post on using your  professional creativity in these lean times.

Doug Sayed, SPHR, CCP is founder of Applied HR Strategies Inc., a Seattle area strategic compensation consultancy, and lead author of the StrategicPay Series "Base Pay Toolkit."

Watson Wyatt just released its salary budget survey summary for 2009 - 2010.  Not surprisingly, the data is low compared to recent years, but not as low as had been projected earlier this year, when we weren't sure if the world was going to implode under the weight of the financial crisis.

Here's a quick summary of the key data:

The entire summary report can be found here.

One good piece of news is that employers seem confident enough that the vast majority say they they will be offering salary increases next year. Only about 10% of participants say they will not be granting increases next year, versus roughly a quarter that didn't grant any increases in 2009.

Projected salary structure increases for 2010 are in the ranges of 2.0% to 2.8% (depending on whether or not you count companies planning no increases), vs. approximately 1.8% to  2.8% in 2009 (same). Both year's adjustments are quite low by historical standards, but to be expected, considering the economy and the battered labor markets.  Only about 2/3rds of employers plan to adjust structures in 2010, vs. slightly over one-half in 2009.

Mixed Signals Complicate HR and Compensation Planning

A variety of major compensation and HR practices studies are showing mixed signals and making current and forward HR and compensation planning more difficult than at any time since the last major recession in the early 1980's.

Some recent studies, since as the Manpower Employment Outlook Survey (MOES) indicate that the outlook for the second half is relatively "stable" (an end to recent declines on the hiring front), while others, such as recent studies released by Mercer and Watson Wyatt indicate the deep impact that recent economic events and developments have had on HR and developing compensation plans and practices.

In addition, WorldatWork recently released the preliminary data for its 2009-2010 Salary Budget Survey, and the data is certainly revealing:

• Of the 2.9% merit increase predicted for 2009 (in the fall of 2008), the actual increase is likely to be closer to 1.9% based on the data from the thousands of companies that participated in the most recent (spring 2009) WorldatWork survey (Keep in mind this is down from around 4% that was predicted at this time in 2008 for 2009.
• Early projections for 2010 are in the 2.8% range for merit increases.  This data is certainly subject to revision due to the major swings in economic expectations over the past several months.
• Salary structure increases are predicted to in the vicinity of 1.8% for 2010, after only about 1.5% increases in 2009 (the lowest in memory).

Due to the highly unpredictable nature of the current economic situation, this is the latest and and most valid information available.  Stay tuned for updates as more tangible and recent data becomes available.

Where is your organization on the compensation transparency continuum?

It's an especially relevant question in today's world of instant access to just about anything. For those of you working in the HR/compensation field for more than 10 years, you probably remember when pay data was something that only a small number of  people in your organization ever saw or even knew about, and it was kept in a locked file cabinet. Today, pay data is everywhere (of course, a lot of this data isn't particularly valid, but that's a post for another day).

Some organizations are remarkably open about their pay programs and pay philosophy/strategy, while others remain tight-lipped about anything related to how compensation is determined and communicate accordingly.

Today, while reading an excellent white paper on the subject put out by the folks at KnowledgePay, it got me thinking that its time for the more "closed" organizations to re-think the whole openness and transparency issue.

To me, openness and transparency, while similar concepts,  are not exactly the same. Openness refers to the degree that the company is "willing to open up" with regard to the details of its compensation philosophy, strategy and program(s).  Openness is more of a strategic issue that HR and senior executives struggle with (what and how much do we communicate?). 

Transparency, however, refers to the degree that program participants can "see" how their compensation program works and how it impacts them.  Openness certainly contributes to this, but transparency goes a step further, referring to what we call the "what's in it for me" question ("WIIFM").  All rewards-related communications (base pay, incentive, benefits, etc.) efforts should keep the WIIFM question in mind as the communications plans are developed.  It's really the one question that virtually everyone thinks about when you communicate to employee groups about anything pay related." (Base Pay Toolkit, 2009).

Research has shown that greater openness and transparency can create greater levels of trust, which is a desirable state for any organization. For instance, studies done by Watson Wyatt have shown that companies with greater levels of management/non-management trust have achieved significantly higher levels of total shareholder return than organizations that have low levels of trust.

Am I arguing for total openness and transparency?  Absolutely not!  But I am trying to argue for enough openness and transparency to foster understanding, greater levels of trust, and so employees can answer the WIIFM question that all employees want to know.

"A lot of the debate about pay transparency is misframed.  Too often it is focused on what employees are paid and the idea that employee pay data should be made more public.  This is not transparency - this is an invasion of privacy. An appropriately transparent pay program is one where we have communicated with employees the why and how of the organization's pay practices." (Ann Bares, Altura Consulting Group).

My feeling is that if your organization has built a competitive rewards program based on sound principles and analysis, what's to hide?  Share the news!

So, in today's' world of instant communication and information accessibility, what is the "right" or "correct" amount of information that should be shared with the workforce?  Ultimately, that's up to your organization's comfort level, but we do know that with greater openness and transparency, it is likely that your organization will help to foster healthy levels of trust, and likely a stronger ability to attract and retain the talent you are seeking to move your organization forward.