Diving into today’s challenges in compensation management
While the labor market might have settled a bit from what we saw in the past few years, employers are still facing many challenges when it comes to attracting and retaining the talent they need. The role of the compensation professional has never been more important.
At a high level, 5 key topics are dominating the discussions and activities of most compensation and total rewards teams in the United States. Let’s take a look.
- State of the labor market: The number of job openings is cooling and unemployment has decreased in the last 18 months. Quit rates have also returned to pre-pandemic levels, signaling that we are no longer in the so-called “Great Resignation.” Layoffs seem to be fairly isolated to the Tech industry. Labor participation — the amount of people who are even participating in the workforce — is something to watch. It’s been decreasing over the past few years, though we are expected to recover some in the next decade.
- Planning for pay changes: In the most recent compensation planning surveys, we’re seeing that the projected merit annual increase budgets are trending lower than they have been in the past few years — 3.5% versus 3.8% in projected last year. Merit increase budgets, of course, are lower. But, what’s really going on with pay? If you look at the same incumbent in the same job as reported in salary surveys, like Mercer Benchmark Database, we see that off-cycle increases are still taking place, effectively adjusting pay above and beyond what’s reported for merit or even total increase budgets. From 2022 to 2023, we saw about a 1.5% gap between total increase budgets and how much pay moved. Clearly, employers are still feeling the need to provide market and other adjustments to retain valued employees. All in all, it’s important for a company not to rely just on published budget numbers but to understand where and how much they really need to spend.
- Leaning into pay transparency: Employees are talking about pay, which means being open about pay ranges and structures is now an issue of attraction and retention. Roughly half of employers are doing some sort of communication around pay ranges, and that includes those who are simply complying with regulations. However, when you ask employees, a staggering 70% say they know their pay ranges, and employees who understand how they are paid and know their ranges are 2 times more likely to believe they are paid fairly. There’s a discrepancy there – it’s likely employees don’t have the information you want them to have, so it’s time to do something about that. Additionally, 50% of candidates said they would not apply to a job if the listing didn’t include pay information.
- Pay for hourly workers: Organizations that are heavily reliant on hourly workers are going to need new strategies to retain hourly employees. That workforce is still showing a very high number of voluntary quits versus layoffs. Employers may need to come up with a bifurcated strategy for their career hourly workers (typically those with certifications or technical skills) where you need to benchmark like jobs versus the transitional hourly workforce. For those who are trying to make the most per hour and will easily go down the street to the next job that will take them to work under the desired working conditions. For those, you need to really understand the labor pool for your jobs and how those employees are paid in a local market. Having a reliable source of local hourly data is critical.
- Future of compensation data: While the importance of highly curated salary data will continue, sources will continue to broaden. Both traditional salary surveys and alternative sources, such as labor market and cost of living data, will play a role in establishing compensation ranges and market reference points going forward. More importantly, you can expect to see base pay become more of a formulaic outcome. Discretion from managers will start to fade away as we transition to other elements to reward performance. Establishing hiring pay will become more directly tied to skills and supply and demand. We’ve always said that compensation is more an art than a science, but, at least in terms of base pay, the move toward more pay transparency will drive toward being more formulaic (aka, “the science”).
Feeling like all of this resonates with you? Listen to 3 of our experts discuss these 5 topics in detail on our recent LinkedIn Live event: Top 5 Things Pestering Compensation Teams.
Unsure how to address these situations in your organization?
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