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Compensation 2018: Have Salary Increases Found a New Ceiling?

Compensation 2018: Have Salary Increases Found a New Ceiling?

By: John Rossheim

What lies ahead for compensation in 2018? Even as we near full employment and with nine consecutive years of economic expansion, the average pay raise is projected to top out at about 3 percent in 2018, according to the WorldatWork 2017-2018 Salary Budget Survey.

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? 

We asked a range of experts to weigh the often confounding compensation dynamics of the New Year that’s fast approaching. Here are their top observations and advice on compensation tactics.

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 3 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.” 

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 now. “Employers should be mindful that this is not the time to trim compensation budgets,” says Chavez.

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.”

Know that more of your competitors are paying retention bonuses. No matter how constrained your budget, gather intelligence on your rivals and how they are distributing compensation across pay types. Retention bonuses rose from 16 percent of employers surveyed in 2015 to 22 percent in 2016. Top-performing companies tend to pay bonuses more frequently than typical companies.

Pay compression should be a growing concern in 2018. Yet another compensation worry is intensifying: pay compression – especially where it creates tension between new hires who were enticed with competitive offers and incumbent employees who feel like they’re falling behind financially. 

“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 be a culture killer.

Seek counsel in applying pay equity and salary-inquiry laws. A pay equity law in Massachusetts that takes effect in 2018 will pressure companies to take into account candidates’ experience when formulating job offers. Employers will need to give 4 percent to 6 percent increases to high performers and less to others, Bernaiche says. 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. Total compensation statements (or total rewards statements) 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.

After all the numbers, comp is 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.

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