The Average Pay Raise: What if an Employee Says ‘Meh’?
Today’s snug labor market is straining compensation belt buckles. Workers want more—but will a three percent raise suffice? Good news: there are other ways to keep them satisfied.
In times of low unemployment, it’s difficult to know if the compensation you’re offering is sufficient to attract the talent your company needs — and whether it can keep them in place. While the question seems straightforward, it warrants some closer inspection.
Even during past periods of full employment, the average pay raise topped out at around 3 percent according to surveys conducted by WorldatWork.
Tight compensation budgets are creating talent challenges, says Elizabeth Bernaiche, compensation practice leader at Insight Performance. “Recruiters are having a tough time.” At the same time, employers are banking on a mix of limited salary increases and “total rewards” to retain in-demand workers.
The question is, will moderate wage increases prevail, or will talent start heading for greener pastures in greater numbers? And how can you keep your herd on the farm?
We asked a range of experts to weigh in on the often confounding nature of compensation dynamics–and got back some top observations and advice on compensation tactics to help you out.
Make the case that a 3 percent raise is what you can offer
What separates companies with major employee retention problems from those that keep most employees satisfied with middling raises? Honesty, flexibility and transparency — of the financial kind.
“Some employees have come to understand that a flat three percent is what is being offered,” says Jodi Chavez, president of Randstad Professionals. “Employees are staying with their employers for flexible arrangements like working from home and for shorter commutes,” as further incentives beyond the average pay raise they may be getting.
Don’t try to curb your compensation costs
Though it may be necessary to keep pay increases in the moderate range, your company will get burned in the talent market if you actually reduce raises especially during periods of full employment. “Employers should be mindful,” according to Chavez, that such periods are “not the time to trim compensation budgets.”
Use bonuses rather than base-pay raises whenever you can
Be generous with bonuses even as you hold down permanent salary increases. “Bonuses are on the rise,” says Tim Low, senior vice president at PayScale. “Employers may choose to reward employees with a bonus rather than a raise, since bonuses don’t compound over time and offer more flexibility.”
Another reason to use bonuses — your competitors are. Businesses have been increasingly utilizing retention bonuses as a way to promote better employee engagement and satisfaction. Top-performing companies tend to pay bonuses more frequently than typical companies.
Be mindful of pay compression as it is a growing concern
Yet another compensation worry is intensifying: pay compression. When enticements for new hires cause their pay to exceed that of existing employees, you’re setting the stage for tension in the workplace as incumbent employees feel as though they’re falling behind financially. It’s important to deconflict your recruitment and retention strategies so they don’t work against each other. This may cause you to take another look at your average pay raises.
“We have a lot of small to mid-size clients with pay compression issues because they’re not offering bigger increases,” says Bernaiche.
But be careful about increasing pay inequality in your workforce
“Wages are increasing much faster at higher-paid jobs,” says Dow Scott, a professor of human resources in the Quinlan School of Business at Loyola University Chicago. Exacerbating differences between haves and have-nots within your organization can also be a culture killer.
Seek counsel in applying pay equity and salary-inquiry laws
Depending on your jurisdiction, you may be facing new laws governing wage discrimination and restrictions on your ability to inquire about past salaries. For example, a pay equity law in Massachusetts which took effect in 2018 requires companies to provide equal pay for comparable work, with limited exceptions for such things as seniority, education, experience and required travel.
These are important to factor into your retention strategy as you don’t want to inadvertently expose yourself to a lawsuit. If need be, seek outside advice on compliance with applicable laws and regulations.
Flex is bending under the pressure of rising labor demand
For in-demand professionals, that old song is back: Show me the money. “Non-monetary perks such as flexible work schedules are down 5 percent year-over-year in favor of cash,” says Low. Leverage flexible work options wherever you can, but know that there are limits.
Total compensation statements can persuade some employees
Using a total compensation statement (or total rewards statement) can help boost at least some of your workers’ engagement.
“The older generation appreciates it; younger employees don’t think beyond base salary,” says Bernaiche. “Maybe they don’t understand total rewards. But if a total rewards statement is clear, employees will appreciate the package you offer.”
Your rewards statement should fully explain each category of compensation and all employer contributions per category. A lunch session with a handout will be more effective than an emailed PDF that’s easy to ignore.
Beyond the numbers, compensation is really all about people
“Employees are trying to carve out a life,” says Scott. “Companies have a lot of leverage, so they’re able to do things employees don’t like.” But wise employers are keeping in mind that if they fail to offer compensation that’s perceived as fair, employees may use the only leverage they have: looking elsewhere.
Is the average pay raise working for your employees?
Compensation strategies are not a one-size-fits-all proposition. They need to be tailored to your industry, workforce and individual employees, but they also need to comply with the law. It can get complicated, which is why we’re here. At Monster, we’ve been in the business of helping employers recruit and retain the best talent and we have expert insights to share with you. Find out how to get free access to the information you need, including the latest hiring news, recruitment tips and more.
Legal Disclaimer: This article is not intended as a substitute for professional legal advice. Always seek the advice of an attorney regarding any legal questions you may have.