Wage risk is increasingly on employee's shoulders, expert says

Pay-for-performance digs in with employers

January 02, 2008|By Andrea Coombes | Andrea Coombes,MarketWatch

Being a worker isn't getting any easier. We're moving from traditional pensions to 401(k)s, full-scale health insurance to consumer-driven health plans and steady annual salary increases to one-time "pay for performance" bonuses and incentives.

Base salaries are expected to increase about 3.9 percent on average in 2008, matching the average pay increase in 2007, according to a Towers Perrin survey of about 4,000 companies worldwide. Those results match a number of other salary-expectation surveys.

It's not much when you consider inflation in October rose at a 3.5 percent annual rate. But more employers now supplement salaries with one-time bonuses and rewards, with more than 90 percent of employers offering such "variable pay" in 2007, up from 80 percent in 2006, according to an annual survey of about 1,000 large U.S. employers by Hewitt Associates, the human resources consulting firm in Lincolnshire, Ill.

Spending on such programs hit almost 12 percent of employers' payroll budgets on average last year, up from 9 percent in 2003, and Hewitt expects that figure to top 12 percent in 2008.

So, there is money available beyond traditional salary increases, but it's only available to certain workers who meet and exceed companies' performance expectations.

"The risk of earning a competitive wage is now increasingly on the employee's shoulders," said Ravin Jesuthasan, a Chicago expert at Towers Perrin, a management and human resources consultant in Stamford, Conn.

"If you go back to the mid- to late 1990s, we saw [salary budget increases] in the 6 percent to 8 percent range," but that all changed after the economy tanked after Sept. 11, 2001, Jesuthasan said.

"Compensation [is] often the single largest expense item" for businesses, he said. In uncertain economic times, "more senior leaders are asking how do we get the most out of this investment and how do we use it as a tool to manage the business," he said.

That's where variable-pay programs come in. They are "a way to deliver those funds without making that long-term commitment [to a fixed salary] - and it requires the employee to perform," said Alison Avalos, an expert with WorldatWork, an association of human resources professionals in Scottsdale, Ariz.

The uncertainty makes employees nervous, said Ken Abosch, a compensation practice leader with Hewitt Associates. Who doesn't like the certainty of fixed salary? With bonus pay, "when results are there, the company pays out. When they're not there, they don't," he said.

But, he argues, bonuses offer "an upside potential that employees don't have with base salaries."

On average, hourly and professional technical employees can expect employers to dole out bonuses of 5 percent to 10 percent of base pay, entry-level professionals and midlevel managers, 10 percent to 20 percent of pay, and senior managers through executives, anywhere from 20 percent to 80 percent or higher. But of course, that pay is targeted to top performers.

The projected salary increase for 2008 is "very mild growth," said John Irons, director of research and policy at the Economic Policy Institute, a liberal think tank.

And surprisingly mild when you consider how robust productivity gains are: U.S. nonfarm workplace productivity increased at an annual rate of 6.3 percent in the third quarter, the fastest growth in four years, the U.S. Labor Department reported Dec. 5.

"We would hope for wages and salaries to increase with productivity growth ... but we see productivity growth is stronger while wage growth is weaker," Irons said.

Why the pressure on wage growth?

Some factors often posited include competition from foreign labor, immigration, a decline in unions' bargaining power and the workplace's technological changes. "There are a lot of explanations out there, but there is clearly no single explanation," Irons said.

Irons does say a weak labor market is playing a role in anemic wage increases.

"The strongest income growth is when labor markets are really tight. The late 1990s are a great example. Employers were scrambling to find workers, and you saw big signing bonuses," Irons said.

Back then, 300,000 new jobs created per month was seen as decent job growth. These days, many experts celebrate 150,000 new jobs created and job gains of less than 100,000 have been posted in recent months, Irons said. And, while the unemployment rate is relatively low at 4.7 percent, it doesn't capture people who are not in the labor force.

"The overall labor market is really creeping along much slower than we'd like," he said.

Employers' expected 3.9 percent salary budget increase for 2008 is an average. That means the news is much better for some than others. A top performer "might get 8 percent, but the laggards might get zero or 1 percent or 2 percent," Jesuthasan said.

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