Top 5 Recommendations for Compensation Plans in 2011

Shhh. Do you hear that? No, it’s not sleigh bells. It’s the sound of coffee brewing and numbers crunching late into the evening hours of corporate America.

Yep, it’s that time of year when organizations are finalizing their compensation plans and budgeting for salary increases for the coming year.

The big questions many companies are considering right now are things like:

• How much of an increase should we give our employees?
• Should we give everyone the same increase?
• Should we give some employees more and some less?
• On what information should we base our decisions?
• How do we get the finance department on board?

Let’s take a look at some of this year’s industry research and important factors that may give you the answers you need to these important questions.

Findings and Trends

According to the 2010-2011 Culpepper Salary Budget & Planning Survey, salary increases are expected to rise again in 2011 after hitting record breaking lows in 2009. In the U.S., salary increases are expected to rise from 2.38% in 2010 to 2.91% in 2011.

The survey also found that most companies reported improved confidence with their cash budgets and will aim with their compensation plans to match or lead market pay rates despite a weak job market.

Other sources such as the Employers Resource Council, Mercer, WorldAtWork, and Towers Watson are all reporting projected salary increases for 2011 from 2.7% to 3.0%.

The Economic Research Institute reports that with the recession starting to come to an end, 2011 will most likely be the year in which companies start to review why certain jobs are paid what they are. These companies will turn to the market for answers.

With that said, do you know the answer to this simple question?

Why do you pay what you pay?

Many companies give across the board raises, which can often send mixed messages. Differentiation based on performance with compensation plans is a popular way to recognize and reward employees that are above average employers.

How exactly does this work?

Differentiation based on Performance

Instead of giving a flat average increase to employees across the board, many companies are differentiating increases based on individual employee performance. In other words, with an average increase of 2%, some companies may give top performers as much as 4%, while bottom performers may receive 1% or less.

A survey by WorldAtWork indicates that employers are planning to give average pay increases of 3.7% to top performers, 2.4% to average performers, and less than 1% to bottom performers in 2011.

Mercer and Towers Watson show slightly higher projections.

Recommendations

Based on these facts and figures, companies, not-for-profits, and other organizations should consider the following strategies for merit increases and compensation plans in 2011.

Use the market to determine pay increases – According to the surveys listed above, consider giving average increases of at least 2.7%, since most surveys show increases between 2.7% and 3.0%.

This will ensure that you are keeping up with industry averages and continuing to stay competitive with your compensation practices.

Stay informed of market conditions – Companies need to continue to stay informed of market changes in 2011. Make sure the market is following projections. If not, adjustments may need to be made throughout the year as market conditions indicate.

Award increases based on performance – Instead of awarding a flat average increase across the board, consider rewarding top performers with a higher-than-average increase, and giving bottom performers a lower-than-average or no increase at all.

This will ensure that your top performers are properly recognized for the contribution they make to the company, will promote a culture of high quality employees, and will help to reduce costly employee turnover.

Consider the budget impact – To get the finance department on board, make sure that recommendations of the compensation plan support the overall goals and objectives of the company.

Make sure you include accurate salary market data from respected surveys in your budgeting plan and make sure the data supports your recommendations. Finally, have a compensation philosophy in place to support your recommendations for increases and/or adjustments.

Consider using a compensation consultant – Often times it is difficult to take on a compensation planning project without needing to ask a few questions here and there.

Using a compensation consultant who will partner with you to develop a strategy for paying employees competitively and fairly will go a long way in helping retain valued employees and reducing turnover costs.

Staying competitive is a driving force for keeping the best and most productive employees within an organization. Certainly,your merit increase practices are critical in this arena. Following the above steps will help you get started to have a solid process for equity in your merit increase planning, and program overall.

Sources: ERI Update, Volume 92, October 2010; 2010-2011 Culpepper Salary Budget and Planning Survey; 2010 Mercer U.S. Compensation Planning Survey; 2010 WorldAtWork Annual Salary Budget Survey; 2010 Towers Watson Global Talent Management and Rewards Survey; 2010-2011 ERC Wage & Salary Adjustment Survey; (title image provided by freedigitalphotos.net)

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