Despite higher productivity, the share of income flowing back to workers has diminished
For the past several years, wage and salary surveys in the U.S. have consistently shown annual increases of about 3 percent across employee groups. And despite ongoing evidence of economic recovery and growth, employers have made few, if any, strides toward increasing salaries and are not expected to do so anytime soon.
This situation isn’t necessarily a product of the last recession—or even particularly new. “Wage stagnation has been occurring since the end of the 2002 recession,” said Jim Sillery, a principal with Buck Consultants in Minneapolis. “Neither recession has been followed by job creation recoveries.”
The lack of significant wage increases became more apparent following the 2008-09 recession, “but it is not a new phenomenon,” said Sillery, adding that he does not see evidence that wage stagnation will ease in the near future.
Cost Pressures and a Nervous Workforce
Quite simply, employers keep wage increases lower when there is no compelling reason to do otherwise. For many companies, turnover remains low while competition remains high. With workers showing little tendency to give up a seemingly secure job to enter the job market, many employers are less concerned about losing talent than managing their costs. “Why increase wages if employers are not losing people?” asked Sillery.
This focus on cost management is a natural outgrowth of a globally competitive marketplace. “The prevailing pressure on organizations is the need to be competitive globally and to hold down their fixed costs,” said Ken Abosch, compensation practice leader for Aon Hewitt in Lincolnshire, Ill. Given that labor makes up the vast majority of fixed costs for most organizations, anything employers can do to keep those labor costs low will have an immediate and significant effect on an organization’s finances. “For that reason, organizations are working very aggressively to try to keep the lid on the costs in this category.”
There are exceptions to these prevailing market forces. “Employers are holding wages stagnant in some areas, but not across the spectrum,” said Phillip Wilson, president and general counsel of Labor Relations Institute Inc. in Broken Arrow, Okla. “The real determinant of wage is the value of the job and level of skill needed to perform the work.” He agreed that downward wage pressure is not likely to ease up anytime soon for lower-level/lower-skill positions, especially with technology promising to eliminate many of these jobs.
On the other side of the equation, there are certainly jobs and skills that command a premium in the current marketplace. For example, competition for engineering, technology and auditing professionals—three areas where demand exceeds supply—is causing employers to beef up pay for these positions.
From Fixed to Variable Pay
Some experts argue that the fixation on fixed pay in the form of salary and wages misses a larger trend in employee compensation. “There is a willingness to spend more in total,” said Abosch. “Variable pay”—including annual incentive bonuses—“is a category where employers have shown some willingness to provide increased earning opportunity based on [workers’] performance.”
This development is not necessarily being reflected in the government’s wage data, which often does not measure variable pay. “The problem is that [wage reporting] is only monitoring half of the equation,” said Abosch. “The real action is in the variable pay arena and that is where organizations are picking up the slack.”
He pointed to Aon Hewitt’s compensation research, which shows no change in salary budgets but a notable uptick in variable pay budgets. In 2012 and 2013, variable pay budgets for salaried exempt workers stood at 12 percent of payroll, then increased to 12.7 percent in 2014 and are projected to stay at that level in 2015.
A key difference between fixed and variable pay is in how it affects a company’s budget going forward. Any increase to fixed salaries and wages increases an organization’s built-in fixed costs. By contrast, most well-designed variable pay plans are self-funding, with payouts financed by the cost-savings, productivity improvements and other benefits to the company that the plan is designed to reward. Moreover, those variable payouts must be re-earned each year.
Consequently, while variable pay plan payouts can have a short-term impact by reducing cash flow when the employer makes the required payouts, salary increases have a long-term and ongoing impact on expenses that can be difficult to alter.
Time for Change?
Like most business challenges, compensation questions are continually evolving. As the economic environment continues to improve, employers would be advised to think about their compensation plans and decisions from the following three angles:
- Monitor stars, high potentials and those with critical, scarce and in-demand skills. In an environment where high performers and individuals with crucial skills are in high demand, employers should be focused on identifying these individuals and monitoring their progress and job satisfaction. Although funneling additional rewards to star performers is important, employers should consider what else these employees might value from the organization, such as learning opportunities, flexible work schedules and so on. Employers that are not doing enough to keep these employees happy could find themselves losing hard-to-replace employees as the economy continues to improve.
- Keep tabs on the marketplace. Abosch recommended that HR and compensation professionals monitor a range of metrics to see where pay levels are headed, including jobless claims, the unemployment rate, inflation, and The Conference Board’s consumer confidence index and leading economic index. For example, as the consumer confidence index improves, turnover could increase as consumers feel more secure about making purchases and, by extension, making changes in their lives, including possibly finding a new job.
- Evaluate variable pay options. Abosch expects variable pay to become the key driver of compensation increases in the foreseeable future. “Even if we continue to see a more robust economy and more job creation, the relief valve for spending is not going to be on salaries,” he said. “It is going to be in the area of variable pay.”
Joanne Sammer is a New Jersey-based freelance writer.
To read more HR news on SHRM.org, please click here.