Compensation & Benefits
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In the past, compensation management used to be rather straightforward. HR departments found new hires quite easily, employees tended to stay at a company for a while, and an annual compensation review was enough to keep both sides satisfied. But the days of 2% raises and ad hoc compensation planning are over.
Inflation, labor shortages, high turnover rates, and generational changes bringing about new trends such as quiet quitting championed by Gen Z, and issues like burn-outs affecting large groups of employed Millenials demand a more sophisticated approach. Volatile market conditions and unexpected challenges in the post-pandemic world became the new normal. But this isn’t necessarily bad. Quite the opposite. For those ready to adjust, they present unprecedented opportunities to get ahead.
HR managers able to develop an agile approach and mature compensation management models will be best positioned to win the war for talent, engage their employees, optimize their budgets, and ultimately save money.
In this article, I describe the most prominent compensation trends influencing the field and effective ways in which HR leaders can respond and harness the potential opportunities brought by these transformations in the face of the above-mentioned concerns, including:
Before we jump to the list of the current effective compensation approaches, it’s important to gauge the stage of your HR department’s maturity. The level of maturity directly impacts your organization's ability to compete in the current talent market and develop a compensation strategy resulting in optimized processes and cut costs.
The five-stage compensation management model describes consecutive phases in the human resources department’s growth as it develops. Although only a small number of companies are able to function at the lowest need-based stage, and only a select few achieve the highest maturity level, most organizations fall somewhere in the middle. With certain processes in place, they are positioned to transition upwards by optimizing current and adopting new practices.
In response to the challenging and volatile environment of recent years, many companies made conscious effort to advance along the compensation management ladder. Competitive talent market and labor shortages coupled with inflation and potential economic downturn motivates many companies to balance cost-optimization and budget control against the increased demands for higher pay. In addition, the emerging pay legislation and compliance requirements add another dimension compensation professionals will have to deal with. In those conditions one can only imagine that that the leveling up the compensation management maturity curve will be a make or break for many firms.
Since compensation managers can no longer anticipate straightforward tendencies, we need to be prepared for various scenarios. Knowing your options and having the ability to choose the right tools will define the HR leaders behind successful companies. So, what are those trends?
More and more companies vie for the top talent by giving out extra cash in addition to base salary.
These include both sign-on, employee retention, and dedicated incentive compensation programs meant to attract and retain both potential and current employees.
Sign-on bonuses offer instant gratification to the prospect and pose an alternative to pure salary competition. In a candidate-driven market, extra cash upfront can make a difference between the prospect accepting the job or not. Provided that the employee stays at the company long enough, a one-time award will usually be cheaper compared to the negotiated salary hike.
Such bonuses also help compensation managers buy out employees from other firms. Those with student-loan repayment grants, variable pay bonuses, short-term awards, and merit grants will be much more likely to accept a new offer knowing they will instantly get back what they forfeit at the current place.
Companies see those benefits. Only in 2021 the number of job postings offering a sign-on bonus increased by 454% compared to the previous year, as per GlobalData research. In fact, top employers such as Amazon, Snapchat, Apple, Facebook, LinkedIn, and Microsoft gave out sign-on bonuses to more than 80% of their new hires!
In general, instantly granted sign-ons are more attractive compared to those spread over time, even though, they come furnished with all sorts of provisions. To ensure effective compensation management, HR professionals typically equip the sign-on with a minimum period the person needs to be employed by the company to receive the award. The details of whether the amount should be prorated or not, and the length of such period vary. It's best to consider those on a case-by-case basis.
Within the inflationary environment, cash devalues quickly. In addition, employee salaries, sign-on bonuses, and cash-based short-term incentives, although important, offer no gratification beyond monetary compensation.
Equity grants are much more meaningful. By granting stakes in the company, compensation managers encourage employees to act like owners. They also motivate to deliver results since most of the long-term equity awards are based on performance.
For example, sign-on equity grants and long-term incentive plans are part of talent management at a number of start-ups. Since those companies tend to struggle when competing for critical positions with large establishments, they leverage equity grants to attract skilled employees.
Granting stocks in the form of deferred compensation plan has already been a common strategy for key figures at publicly traded companies. To the extent that the CEOs of Tesla, Amazon, or AirBnB receive all their compensation in the form of stock or option grants. Mid-size, small, and up-and-coming businesses will do well following their suit. Especially so, as equity grants are undeniably a tangible form of recognition and employee appreciation.
Company share awards, especially in the form of long-term incentives, have traditionally been limited to the executives, but nowadays, the increasing number of forward-thinking firms use the equity in their strategic talent management. In the face of raging inflation, skilled labor shortages, and plummeting employee engagement it’s not a question of whether to grant shares, but to whom and to what degree.
Quiet quitting. Although not new, the idea of doing minimum at a job has recently stolen the scene of the most discussed work-related trends. In fact, according to the Axios/Generation Lab poll, as many as 82% of Gen Zers find it appealing, and 15% openly admit they are already practicing it.
The bleak economic and political outlook seems to have deterred at least some of the employees from job-jumping - a pattern that let them most easily negotiate salary hikes. The more appealing idea seems to be a certain paycheck in exchange for meeting bare requirements. This is truly worrisome, especially so that we spend most of our awakened lives at work.
In fact, employee motivation and engagement worldwide are on a sadly low level, with the US and Canada as leaders in job satisfaction scoring only 33%. And an abysmal 14% for Europe, closing the bottom of the poll. Although the managers and team leaders have the largest capabilities to improve those results - since most of the issues negatively affecting the engagement relate to stress caused by unfair treatment, unmanageable workload, communication issues, lack of support, and unreasonable time pressure - the role of human resources cannot be underestimated.
First, HR leaders need to educate other managers about the existence of this problem, the consequences of low engagement, its impact on the business bottom line, and the untapped potential that lies within those employees.
Second, we should design compensation management processes that motivate employees to achieve results. In fact, incentive compensation programs such as result-based pay harness the support of 69% of employees, according to the Adecco Group study. And nowadays, more and more employees transition to contingent, project, or contract jobs.
Variable compensation strategies also positively impact performance management, with those who chose not to quiet quit being adequately rewarded for their efforts. This is not to be taken for granted. Quiet quitters can negatively affect the performance or engagement of the entire team.
The other antidote for low engagement, as well as talent attraction and retention, are personalized rewards and tailored employee compensation packages.
We all know that you can align incentive compensation management with diversity and wellness initiatives while at the same time addressing the custom needs of a particular employee with indirect pay. Employee benefits such as health insurance, parental and caregiver leaves, mental health programs, family planning services, sport and gym memberships, student loan repayments, and debt management programs, as well as all sorts of insurance and retirement plans, have been offered in a cafeteria-style approach more often than not.
Yet, the concept that you can do the same with direct compensation for all employees is rather new. Traditionally, compensation managers designed such packages for executives, and, more recently, employees with critical skills. But with plummeting engagement and progressive fragmentation of the job market, many organizations need to go a step further. Equity grants, sign-on bonuses, and short and long-term incentives should all be viable options during the recruitment and as a part of the current human capital management programs alike.
Although the inflation rate in the US has been slowing down for the fourth consecutive month, the 8.2% rate is still a concern. In Europe, however, we continue to see a constant climb, with an average of 10.9% for the EU and 8.8% for the UK.
No wonder, then, HR departments have been overwhelmed with employees requesting the review of their employment terms. Even worse, many of them ditched that step and went straight to interview at other companies. As employers see their employees' salaries melt at an alarming pace, instead of waiting for the workers to negotiate their salaries, compensation managers should anticipate those concerns and take the initiative to alleviate them.
The labor market is so tight that the essential dynamic of supply and demand is just pushing up the price of labor right now, so companies are desperate to hire, there are not enough people out there looking for jobs, sometimes they have to poach someone from another company, so they're raising wages in order to attract and recruit people
Lauren Weber, the Wall Street Journal
This is why a number of firms have already introduced more frequent compensation reviews. For CoorsTek, a manufacturer in Colorado, that's the only way in which they are capable of hiring enough people to keep the operations going.
According to a Mercer survey, at this point, 6% of companies are sure to increase the salary reviews to more than one per year. And that number will only increase. Performing compensation analysis twice or three times a year allows for a much more frequent pulse check of where your employees stand with respect to competition, internal benchmarking, and best market practices on fresh compensation data.
Can we really nowadays rely on surveys released yearly, nine or ten months later, when we are trying to recruit new hires or explain to a concerned employee they are receiving a fair salary? The contemporary market changes so fast that compensation management data become outdated in a matter of months. By not increasing the frequency of salary reviews, you are risking lagging behind and losing top talent.
ESG (environmental, social, and governance) metrics are performance measures companies frequently use to encourage improvements in the area of transparency, sustainability, and compliance. Compensation managers have been increasingly adopting ESG measures to meet the public expectations of more sustainable living, transparency, equality, and overall well-being. In fact, the World Economic Forum has developed a set of ESG metrics to standardize ESG reporting, unify the ESG indicators and promote transparency in sustainability reports. The document is not legally binding, but we can expect that sooner rather than later, governments and states will probably formalize ESG requirements.
In 2021 already, 68% of companies incorporated ESG metrics in their executive incentive compensation plans. Yet, the regional differences are substantial. For example, 59% of US companies (8% up compared to the previous year), use ESG metrics in short-term incentives compared to 75% of their European counterparts (3% more than the last year).
Long-term incentive plans mirror this disparity as well, with only 5% of US organizations with ESG metrics in LTIPs (+2% compared to the previous year) versus 28% of those located in Europe (7% up from the previous year). Nonetheless, the trend is on the rise, and we can only expect Americans to follow suit with Europeans, who have been traditionally leading the environmental change. In fact, environmental metrics are currently a standard among the US public companies in the energy sector, and many fashion brands such as Nike, Levi Strauss, and Gucci.
But it's not just about climate change. According to Jack Connell, a leading compensation consultant at JCCC, it's the transparency and equity metrics that are hot right now. Those include the CEO to median employee pay ratio or the percentage of shareholders’ approval of the executive compensation plans.
Although currently, those metrics are prevalent in the executive performance data, it's reasonable to see that trend trickle down to lower echelons of the company. Especially when ESG goals become required legally. If your company has not adopted ESG metrics as a part of the incentive compensation management plan yet, it would be wise to get ahead and consider introducing some in the next compensation planning round.
Equal pay is no longer a nice to have. It's a must for every company competing for talent in today’s tight market.
Moreover, back in March of 2021 EU had already proposed a directive establishing pay transparency standards for all member states. According to the document, employers will need to report the pay data with respect to sex for workers doing the same job. Companies with unjustified differences greater than 5% will be at risk of severe fines.
Mandatory gender pay gap reporting has been legally regulated in the UK since 2017 and quite a few individual states in the US have passed similar laws in the last couple of years. As of September 2022, California began requiring employers to publish detailed information on salaries and report pay data by race, ethnicity, and sex annually to California's Civil Rights Department.
Such measures are clearly needed since American full-time female employees still earn only 83% of what men do, and that difference is even greater for black and Hispanic women. The state of the job market post-pandemic and the expectations of younger workers exerted strong enough pressure to enhance transparency and equality, that many organizations started to publish the pay data unprompted by the law. Millennials, and especially Gen Z's focus on diversity causes, will likely soon push for transparency in other types of the pay gap, such as LGBTQ+ and workers with disability.
In light of these developments, compensation management professionals have to be ready to analyze and provide detailed reports concerning salary data across gender, race, age, job grade, tenure, and location. As the complexity of analysis and reporting requirements rises, HR leaders may not be able to cope without professional compensation management systems in place. And since identifying, remediating, and preventing pay gaps is certainly one of the top concerns of contemporary compensation management, you need to have a compensation strategy in place.
From the above analysis, the picture is clear. Fragmentation, divergent trends, high level of personalization, and proliferation of alternative compensation models coupled with the increasing complexity of rules and regulations simply demand that HR managers rely on professional compensation management software. Few, if any, firms, will be able to do comp review twice or thrice a year, unless they double their staff. Most of the human resources departments are already understaffed, and we can't expect great improvements in this area with current labor shortages and inflation exploding the salary budgets.
Professional compensation management software is a viable alternative. And it may be vital to the survival of some of the organizations.
Those compensation management systems are not what they used to be just a couple of years ago. The modern platforms offer comprehensive management of the compensation processes, complex tools for data analysis, provide planning, forecasting, scenario modeling, and even budget tracking. Depending on the size of your organization and the complexity of the compensation management, you can choose software that will inevitably help you take care of the entire comp cycle - organize your processes and meet all the deadlines.
Comprehensive compensation management software such as beqom or Payfactors provides a centralized platform, where you can gather, store, and analyze all your data in one place, with track changes and history logs. These tools also provide automated budget checks and calculate recommended salary raises, bonuses, and personalized rewards. The beauty of it resides in that you can create an unlimited number of dedicated incentive plans without increasing your workload - the compensation management program will do the calculations for you. Cash incentives, equity awards, result-based pay and performance management are all parts of these platforms.
Moreover, these products come furnished with employee compensation analysis and reporting tools, making it easy for you to check and execute your compensation philosophy, or provide business insights and recommendations to the management board. And you can't even compare the level of security offered by the spreadsheets. By the way, spreadsheets are no longer security compliant.
A good compensation management system offers hierarchical access structures where you can control who and when sees what. It even helps you compile data and prepare reports for internal and external audits alike.
Other types of compensation management software, such as for example MarketPay, deliver reliable market data for benchmarking in real-time and pay equity plugs that help you analyze not only existent pay gaps but forecast if you are in danger of inequity in the near future. There are also dedicated platforms for the compensation management of sales teams and variable pay calculations.
Nowadays, the compensation management software market is full of multiple solutions and companies that won't even consider looking at those tools are at serious risk of lagging behind the competition with regard to talent retention and strategic business decision-making. Compensation comprises 60% to 70% of budgets in most firms. Mistakes and decisions based on guesswork instead of hard data significantly affect the company's ability to succeed. With digital transformation taking over most of the business aspects of company management, it's now time for compensation departments.
Compensation professionals can no longer anticipate straightforward tendencies, but we need to be prepared for various scenarios. Knowing your options and having the ability to choose the right tools to ensure effective compensation management will define the HR leaders behind successful companies. In times of labor shortage, skyrocketing inflation, and disengaged employees, it's a make-or-break to being able to attract new hires and retain current employees by thoughtful structuring of direct pay in addition to benefits and indirect compensation.
Forward-thinking compensation managers will also be sure to test out professional compensation management software as a way to get ahead of the competition. And virtually every human resource department should push their organizations towards the higher levels of maturity.
With the agile approach, right selection of compensation tools, and optimized processes in place the global reshuffle presents itself as an opportunity to win talent, increase engagement, promote fairness and transparency while increasing the effectiveness of your budget and team.
Find out more about compensation management software.