<b>Internet Explorer is no longer a supported browser on imercer.com.</b> For an optimal experience on imercer.com, please use Chrome, Edge, Firefox, or Safari.
Welcome to imercer | Questions? Call
By Lauren Mason, Mercer
Originally published in HR.com
When an employee does an outstanding job, managers want to reward their performance. The chance to do this is with the annual pay raise. The trouble is that managers also have to give everyone else a raise at the same time, and tight budgets leave little room to manoeuver. Mercer’s 2018/2019 US Compensation Planning Survey found that top-performing employees get an average increase of just 1.7 times more than colleagues with on-target performance. On a base salary of $60,000 that works out to a new rate of $62,820 for a top performer compared to $61,620 for the on-target performer. The best performing employees may be wondering if it was worth the effort.
This situation often occurs because there is a longstanding misconception about the annual salary increase. For years, employers have thought of it as “merit” pay – a permanent financial pat on the back for employees’ performance. This perception does it a disservice. Yes, the pay raise represents how much employers value an individual’s contribution, but it also symbolizes much more. It sends employees messages about how they are valued compared to colleagues and how they are valued relative to the market.
Yet, if the salary increase wears many hats, it usually gets one shot – once a year – to fulfill these multiple objectives. And employers expect it to do so with an amount that plateaus at 3% of payroll. Mercer’s latest US Compensation Planning Survey revealed salary increase budgets for 2018 were flat at 2.8% and projected to be only 2.9% for 2019.
As a result, the impact of the salary increase on performance is often muted, with employees receiving mixed messages that leave them dissatisfied. Research by Mercer | Sirota shows that employee satisfaction with pay for performance has been on a downward trajectory over the last five years, dropping from 55% to 47% between 2013 and 2017. This is of particular concern given the historically low unemployment rate in the US, and that nine out of 10 executives expect stiffer competition for talent in upcoming years, according to Mercer's Global Talent Trends report.
So, how can employers help the salary increase be more effective? Here are four ways:
With all these alternatives to the salary increase, the temptation is for employers to worry that they may be spending more on pay. But limiting the salary increase budget could be an ineffective method of cost savings if not keeping pace with the market. The costs simply manifest elsewhere, like with increased turnover, onboarding replacement talent, and reactive pay adjustments throughout the year to keep up with market realities. Embracing a new model enables employers to leverage one of their greatest assets – their people – to compete in the future of work.
Lauren Mason is a Principal and Global Rewards Solution Lead for Mercer’s Career business, based in Atlanta. She consults with organizations across sectors and geographies on issues related to employee rewards. She is passionate about helping clients design total rewards strategies that meet employees’ contractual, experiential, and emotional needs to leverage a thriving, more productive workforce.