Has the time come to shake up the annual merit increase?
Yesterday we began coverage of our survey findings where 124 compensation and HR professionals provided their answers to that question, based on what is happening in their respective organizations. We learned that while most respondents' organizations are not considering changes to their annual salary increase policies beyond tracking and responding to competitive salary increase levels, a sizeable minority (34%) are attempting to break new ground. We learned that smaller firms (<500 FTEs) may be leading the way in this regard. We learned that there is still a lot more talk than action happening, with three times as many organizations considering changes as have already planned or implemented them.
And we also learned something very interesting: that the kind of changes being talked about are quite different than the kinds of changes being planned or implemented. Take a look at the tables below. Notice that differentiation tops the options being considered, but it drops to a distant third when it comes to those that have been already implemented.
These data show that differentiation is the option most under consideration, cited by over half of those who have something “shaking.” (Differentiation, you'll recall, was described as moving from a one-size-fits-all to a more selective policy that differentiates salary increase opportunity in response to mission critical skills, job value or other factors.) Differentiation, however, comes in second to Shifting from Fixed to Variable where plans have been put in place to move forward in the next 12 to 18 months. Differentiation comes in a distant third to Shifting From Fixed to Variable and No Longer Annual when it comes to changes that have already been implemented.
While the earth may indeed be starting to move under the annual merit increase, there appears to be more talk than action at this time – more organizations are discussing or considering changes to their annual salary increase policy than have actually made near-term plans or gone forward with implementation.
It is also very interesting to note that the options being discussed and considered relative to changing the annual increase practice are different than either plans that are underway or changes that have already been implemented. What’s driving conversation, but not yet a lot of action, is the notion of differentiation. As organizations look to the future and reflect on how to best direct the spending of precious base salary dollars, they are increasingly coming to the conclusion that this longer term investment must be done in a manner that responds selectively to business and talent needs (versus “one salary opportunity fits all”), helping to cultivate and craft the workforce needed for tomorrow’s success. Yet, very few respondents have made definite plans or taken the first steps to put a truly differentiated salary increase approach in place.
There may be a number of roadblocks, but a most likely one is that those charged with managing and supporting salary policy do not yet have the data or the analytical tools in place to define and categorize their workforce in a manner that supports differentiation in salary increase opportunity. There is a tendency, among reward professionals, to focus on external benchmarking and competitive practices at the expense of looking more deeply within, and developing a more empirical understanding of our own workforces. And so while we appreciate and value what differentiation has to offer, few of us may be in a position to execute on that potential.
Instead, those moving forward with definitive plans and implementing changes are focusing on shifting some of their available salary increase dollars into variable pay opportunity and extending salary increase timing to a period longer than 12 months. These moves may help reduce some of the pressure on salary increase budgets, but do not demand the kinds of sophisticated information and tools that differentiation does. They also fall somewhat short of the more strategic impact that a well planned and executed differentiation approach might deliver.
That's my take on the survey results. What's yours?