Article main image
Jun 25, 2015

Last month, The New York Times published an article bemoaning the loss of pay raises in favor of one-time bonuses and non-monetary rewards.

Cited in the article, analyst firm Aon Hewitt calls this a “drastic shift” based on the firm’s annual survey on salaried employee compensation.

The share of payroll budgets devoted to straight salary increases sank to a low of 1.8 percent in the depths of the recession. It dropped to 4.3 percent in 2001, from a high of 10 percent in 1981. It has rebounded modestly since the recession, but still only rose to 2.9 percent in 2014, the survey of 1,064 organizations found. (These figures are not adjusted for inflation.)

Aon Hewitt did not even start tracking short-term rewards and bonuses — known as variable compensation — until 1988, when they accounted for an average of 3.9 percent of payrolls. Ten years later, that share had more than doubled to 8 percent. Last year, it hit a record 12.7 percent.”

The article goes on to point out, “Over the past 12 months, real average hourly earnings have increased by just 2.2 percent.”

Employees don’t get a lot from 3% raises

After reading this article (and now sharing it with you), I have two questions.

1. Why are we surprised that average salary increases are at 2.2 percent on average?

Merit increase structures have been low for years with very little differentiation between the top performers and the average. Indeed, I’ve seen many stories about merit increase budgets being split such that top performers reach a 3 percent raise, average performers a 2 percent raise, and low performers a 1 percent raise (if any).

Considering research reported in Psychology Today showed “a merit raise needs to be about 7 to 8 percent in order for workers to feel pleased about the raise and motivated to work a little harder,” our current approach to raises is a long way away from achieving the goals of our investment.

That’s why I’ve long advocated for consideration of a new approach. Give all employees annually an across the board Cost-of-Living Adjustment (COLA) of approximately 2 percent. (COLA for 2015 in the U.S. was 1.7 percent.) Then create a strategically designed social recognition program in which all employees are eligible to recognize and reward others and be recognized themselves – in real-time – when they’ve contributed to or achieved performance-based metrics.

Maybe we need to redefine workplace rewards

This is only practical, however, if we redefine what we mean by performance based rewards, which leads me to my second question.

2. Should we start thinking about performance-based rewards in a new light?

“Performance-based rewards” needs to mean something different than “results or outcomes only.” The definition of “performance” needs to include the behaviors demonstrated in achieving results, the ability to contribute well in the face of trying circumstances, and wisdom to extract valuable lessons from failure quickly. Doing so broadens dramatically the reasons for which employees can be rewarded throughout the year in sync with the efforts being recognized.

Many companies are already moving down this path. The Aon Hewitt research showed, “91 percent of the companies surveyed have at least one broad-based reward program, up from 78 percent in 2005 and 47 percent in 1991.”

The positive psychological impact of raise lasts but a very short time. The positive impact of appreciation and recognition, tied to appropriate, calibrated rewards, lasts much longer with the added benefit of directly reinforcing behaviors and actions you want to see again and again.

Instead of bemoaning the loss of meaning merit increases, perhaps it’s time to rethink how we allocate our Total Rewards budgets.

What else should be included in a new definition of “performance?” How should we best structure raises in the era of Total Rewards?

This was originally published at the Compensation Café blog, where you can find a daily dose of caffeinated conversation on everything compensation.