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Checking in on your organization’s compensation philosophy

Inflation may be a little less of a hot topic these days, but it’s still on the minds of many employers. One specific task that you and your team will need to look at is how to handle adjustments to your employees’ compensation based on inflation and other factors. A couple recent surveys provide what could be considered a baseline for the conversation.

New normal?

Global consultancy Mercer released the results of its Compensation Planning Survey in September. Responding employers reported plans to provide employees with merit increases of 3.5% (down from 3.8% in 2023). They also disclosed projected total salary increases, which include raises attributable to promotions and cost-of-living adjustments, of 3.9% (down from 4.1% in 2023).

Another report, the Annual National Salary Budget Survey, published by compensation data and tech solutions provider, delivered a similar data point. It found that, for the third consecutive year, responding employers are planning a median raise of 4% across all employee categories, from hourly wage earners to salaried executives. That news gave rise to speculation that 4% raises are the “new normal” for employers.

Discussion points

Of course, the percentage increase that your organization decides to provide is entirely up to you. But it’s generally advisable to address and announce pay adjustments within the context of a carefully considered and well-communicated compensation philosophy. After all, employees tend to not respond well to the appearance that these things are happening haphazardly. Some key questions a compensation philosophy should address include:

Are we using the right benchmarks? Although salary surveys can tell you the average pay levels for jobs in your labor market, they may not tell the whole story. For instance, an employee who makes an average salary in your industry and location might be worth much more to you based on factors distinctive to your organization — such as experience, position-specific skills or relationships with key customers. And an employee who understands this value, particularly when it’s high, probably won’t be content with pay that simply matches a market average.

What employee behaviors are we really rewarding? It’s important to establish a clear link between the activities you’re rewarding and your strategic goals. For example, if your goal is to raise employees’ skill levels so they can assume greater responsibilities, does their compensation reflect the “upskilling” that occurs? Or are they still being paid based on the previous version of their positions?

Is our incentive system too complicated? Many employers today devise complex bonus systems that touch on multiple performance metrics. But employees aren’t finely tuned machines that can calibrate their efforts precisely in response to a multitude of incentives. If they feel as though they’re being pulled in too many directions, or don’t really understand the algorithms involved, the bonus program could disappoint employees or even lower their morale and productivity.

The path forward

As you put together your organization’s annual budget for next year, compensation adjustments will no doubt play a major role. Work closely with your leadership team to address the matter with both employee retention and financial stability in mind. We can help you assess the pertinent data points involved.

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