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The State of Salary Budgets and Performance Rewards

Employers will be facing the dilemma of stretching compensation dollars to both attract talent and effectively reward top performers, with salary budgets slim for 2006. According to the HRI Highlight Report on Compensation Trends by Donna J. Bear, average salary increases will remain under 4% and established salary ranges for jobs will be tweaked by only 2.5%, leaving non-monetary rewards in the spotlight.

When the economy tightened in the early 2000, writes the Human Resource Institute's research analyst, “Merit pay systems fell in popularity due to their inability to adequately differentiate among performance levels. The concept of ‘total rewards,’  first suspected to be just another buzzword, is now embraced as a strategy, especially when it can be tailored to individual preferences. Although the components of a total rewards package can differ from one firm to the next, the package often hinges on base pay as the cornerstone, supplemented by variable pay, core benefits, pensions, voluntary benefits, training, development, recognition and even work environment.”

Citing the WorldatWork’s 2005/2006 Salary Budget Survey, Bear notes that the most popular monetary compensation tools are sign-on bonuses (64%), employee referral bonuses (63%) and market adjustments (60%). Individual spot bonuses and retention bonuses appear to round out the five top-rated programs, offered by 43% and 30% of surveyed employers, respectively. One-quarter of employers surveyed said that they use stock options, 19% use group incentives and 17% offer project milestone or completion bonuses.

Bear observes that “while linking pay to goal achievement is an important aspect of most compensation strategies, there are advantages and disadvantages to various approaches. An ‘all or nothing’ plan inspires diligence but might also encourage shortcuts and can be discouraging to those who miss by a hair. Tier systems sometimes cause employees to stop short rather than stretch for the next level. And a subjective bonus granted after the fact can lead to grumbling by some, but it allows managers to recognize special circumstances.”

Bear notes that Pfizer Pharmaceutical Group Canada is one firm that ensures corporate goals cascade down to affect individual employee behavior. She observes that bonuses are tied to three levels of achievement: overall organizational performance, team performance and individual performance. While upper-level employees’ bonuses are more heavily weighted toward overall company performance, other workers’ bonuses are more heavily influenced by individual performance. Luc St-Pierre, vice-president of human resources, said, “Incentive plans are a communication tool, we’re telling people what is important to reward—and reward significantly.”

And, in today’s high-pressure work culture, employees need a better reason than competitive pay for continuing to invest their human capital in the workplace. According to the Society for Human Resource Managements 2005 Reward Programs and Incentive Compensation Survey Report, says Bear, “Incentive plans, monetary rewards and non-monetary rewards are all more effective at retaining top performers than they are at recruiting.” Bear cites a study by the Incentive Federation that showed that while cash bonuses are sometimes viewed as entitlements, non-cash incentives such as merchandise, travel awards and other individualized incentives are likely to hold more appeal.

Bear concludes: “Such customization may be one method of developing more effective compensation strategies.” She quotes Dr. Angela Bowery, a specialist in organizational research, “The key to success may be extensive consultation, allowing employees to adapt their expectations to the rewards available, while having some influence on the features of those rewards.”

For more information on the HRI Highlight Report on Compensation Trends, visit www.hrinstitute.info. Copyright 2005, HRI.