Contemplating between the annual salary raise and variable pay is a perpetual balancing act for employers.
Contemplating between the annual salary raise and variable pay is a perpetual balancing act for employers. The competitive landscape for talent recruitment has enlightened many organizations on the true meaning and value of human capital. While employee compensation is reported as an operating expense in the ledger, organizations are rediscovering that human capital is an asset that entails accommodative compensation models to extract the most value.
The Blight of the 3 Percent Annual Raise
U.S. businesses have sustained a 3 percent median annual salary raise for their employees for nearly a decade going back to the last bear market recession, as the Society for Human Resource Management (SHRM) notes. As the Standard & Poor's 500 index has since recovered over three-fold off the lows, annual salary raises have not only remained the same, but are expected to stay flat into 2018, according to SHRM.
While organizations could justify this during a recession, the continued suppression of wage improvements conveys a message of complacency, which can leave workers feeling minimized and underappreciated. Combined with a tightening labor market, it's inadvertently likely to foster an environment that favors job switchers, who receive an average salary increase of 10 to 20 percent with their new employers, as Forbes notes. This current model rewards desertion and punishes loyalty. Organizations tend to front-load the benefits for new employees only to cap further upside by reverting to the 3 percent annual salary raise, which can encourage another job switch as the cycle repeats itself.
Rise of the Hyper-Hopper
This costly cycle has spawned a new category among job seekers known as hyper-hoppers — employees that switch jobs annually to progressively improve net salaries and benefits. Mercer reports 34 percent of surveyed employees plan to switch jobs within a year. According to Gallup, 44 percent of employees and 50 percent of millennials would consider switching jobs for a 20 percent or less salary raise.
Fixed Compensation Model
The conventional merit-based fixed compensation model utilizes monetary components like salary and hourly wages to award performance. This model warrants an annual performance review to determine if and how much of a salary increase will be given, likely 3 percent. However, too many organizations fail to distinguish the outperformers by applying the standard blanket 3 percent annual pay raise across the board. This lack of talent recognition can potentially lead to disengagement and job switching, which further propagates a culture of complacency. Salary increases are long-term commitments that usually can't be taken back. This model puts pressure on operating margins without assuring ROI improvement.
Variable Pay Model
Variable pay, also called incentive or performance pay, has two types of components, monetary and non-monetary. This form of compensation is paid out periodically when employees exceed milestones or transcend above and beyond the responsibilities of their roles. It rewards both exceptional tangible or intangible performance. This flexibility and personalization is best suited for outperformers and top talent. Monetary variable pay bonuses include cash, checks, prepaid debit cards and gift cards. Non-monetary variable pay includes retirement plan matching, stock options, profit sharing, remote work, flex time, health/life insurance, paid sick/personal/vacation days and a boost to almost all benefits. Organizations can receive a better ROI with this reciprocal model.
Customizable Benefits Marketplaces
Benefits marketplaces empower employees to customize their own benefits package, in accordance to the spendable balance amount allocated to them from their employers. Variable pay bonuses can further increase benefits spending funds. According to MetLife, customizable benefits are a hit because 72 percent of employees would increase loyalty with their employers if provided this ability.
Organizations have the opportunity to listen empathetically to employees and gain key insights by performing periodic stay interviews. Identifying and cultivating outperformers and future talent with the right balance of fixed compensation and variable pay awards is the essence of prudent human capital investment.