Now that the economy and labor market has started to (weakly) recover, does this mean that it's back to business as usual for rewards professionals?  The short answer, in my opinion, is no.

Not that we won't be performing many of the same activities that we have for years, but ongoing trends, along with the devastating impact of the 2008-2009 recession, have combined to create the perfect storm for potential change in the ways we look at base pay management, variable pay, and qualitative or non-financial rewards.

Just as many economists feel the recession has led to some fundamental changes in consumer behavior, I believe that some fundamental changes in in the way that various forms of rewards are utilized are already underway.  For instance, a report done by Hewitt last year, predicted that over the next decade variable pay budgets will continue to rise (to 16% of payroll, up from about 12% today and half that back in the early 90s), while base pay increase or "merit" budgets will continue downward, from close to 4% prior to the recession, to about 2.5% to 3.0% today, and to about 2% in 2020. While no one knows if these specific numbers will hold up 10 years out, I believe they have nailed the general trends with their predictions.

Over the next decade employers will continue to endure painful benefits costs increases (healthcare reform or not, medical costs are rising out of control), crowding out potential spending on other rewards programs, especially for base pay increases.

Base pay is destined to be a serious pinch point for both employers and employees, as companies strive to keep fixed cost increases moderate, while employees lament the lack of pay growth. Between the long-term shift towards more variable pay, the cost squeeze created by ever-increasing healthcare costs, and the weak labor market (and predicted to be weak for some time), base pay has no where to go except barely up. Some pundits also see a change coming in the way merit pay is doled out.  For instance, see "Paying it Forward:Ideas Beyond the Traditional Merit Matrix" by Ann Bares via the Compensation Cafe.

To augment the lack of excitement at the base pay level, many savvy employers are paying more attention to qualitative rewards, i.e., rewards that are not based on monetary payouts, but more focused on addressing other "higher order" needs (in Maslow's Hierarchy of Needs), such as building a culture of appreciation and recognition, offering greater opportunities for training and skill development, offering greater work schedule flexibility and other work-life fit options, and in enhancing the overall culture of the organization in ways that are more employee friendly.

There are not going to be a lot of fixed dollars to throw around in the next few years, and so it will be incumbent on organizations and rewards professionals to make better and more creative uses of the various rewards alternatives available to them.  Motivating and retaining workers has never been "just about the money," but that concept will prove to be even more relevant in the 2010s.

Doug Sayed is principal at Applied HR Strategies, a Seattle area compensation consultancy, and lead author of the StrategicPay Series Base Pay Toolkit, a guide for helping non-compensation experts to develop their own strategic compensation programs.  Doug is a Certified Compensation Professional (CCP) with over 25 years of HR and compensation experience, and a Master's degree in HR management from The Ohio State University.

Is it crucial to maintain a competitive pay posture to attract and retain high quality talent?  We think so (that why we spent over a year writing a book about how to do it!), and most HR and rewards professionals believe that as well.  But does paying competitively make your people happy, engaged and/or driven to perform?  Generally not, unless you're using a well-designed incentive program to drive certain behaviors (but that only addressees the behavior component).

Competitive base pay is absolutely critical to attract talent, and to maintain a basic level of satisfaction with the compensation that employees receive for voluntarily sharing their skills with your organization.  Beyond base pay though, what really drives motivation, worker engagement and the desire to stay with an organization are how you manage and treat them.

See the table below and tell me what you think of the difference is between an employee who is willing to stay with your organization because they are basically satisfied (but not terribly engaged) vs. an employee who really wants to stay with your organization and believes in it (i.e. is engaged).

Source: Employee Hold'em, 2009

The data above is from a large study done every two years or so by by an organization that focuses on employee engagement, and the results are clear: it's not just about the money!  In fact, we would argue that how you manage and treat your employees is more important than the money, assuming the money is about where it should be (you're paying at least close to or better than competitively).

With dollars scare these days (over 50% of employers gave 0% - or less - pay increases last year, and 2010 pay increase budgets are south of 3% for now), how you treat your employees is even more critical.  Hence, there is a growing movement towards more qualitative rewards (feedback/communication, appreciation, training, etc.) , as opposed to just quantitative ones (mostly pay and benefits)

We'll continue to bring you more information and data on this large topic of worker psychology, qualitative rewards and employee engagement in the coming months.

Don't miss an opportunity to sign up and participate in these upcoming events:

Compensation, Rewards & Employee Engagement Trends - 2010 and Beyond (approved for 3.5 HRCI Credits)
Date: May 13th, 2010 8:00 AM to noon
Location: Bellevue Harbor Club
Cost: $295.00
Register for this Event

Organizations are struggling to keep up with changes in salary and compensation trends. As the economy recovers, what is the future of pay and employment? What can employers do to retain and re-engage talented employees? In this half-day session, participants will explore 1) the latest compensation trends and future rewards thinking and 2) the elements of a successful employee engagement and recognition strategy. Participants will take away low-cost tools, ideas and resources to build a culture of appreciation within their teams and organizations. Workshop instructors include StrategicPay Series creator, Doug Sayed and Chief Motivation Officer, Theresa Chambers of Recognition Works. The program will be held at the Harbor Club in Bellevue from 8am to noon. The program includes a continental breakfast, parking validation, as well as a discount coupon to purchase the Base Pay Toolkit worth one-half the tuition cost alone, if interested.

 
Utilizing Market Data & Conducting a Competitive Pay Analysis (approved for 3.5 HRCI Credits)
Date: June 10th, 2010 8:00 AM to noon
Location: Bellevue Harbor Club
Cost: $295.00
Register for this Event

This half-day program will focus on how to conduct a market-based pay analysis, including selecting and using pay data sources, grading jobs into a salary structure and evaluating how the company measures up.  This is an advanced, in-depth course.  Participants will walk away with a working knowledge of the subject matter, as well as the tools and templates to execute in their company.  The cost includes a continental breakfast and parking validation, as well as a discount coupon to purchase the Base Pay Toolkit worth one-half the tuition cost alone.

Thank you to my "guest posters" for sitting in while I was away!  I'm back, but will have a few more guest posts, because so many colleagues were nice enough to contribute.  Getting back to my own work though, temporarily at least, the following post is a from my recent post at the Compensation Cafe.

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 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 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 help to engage and retain employees (or to 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.

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.