Today, we see greater differentiation in compensation, particularly for those deemed to be high performing employees. Instead of pay being equally spread, we are more often seeing relatively smaller increases for moderate and lower performers, with greater budget allocated to employees with outstanding performance. This way organisations are allocating their budgets more effectively to ensure there is room for higher salaries if the performance requires it.
A more fluid and ongoing approach
Performance-related pay has been a common practice already for many years, but now we see it evolving to a more dynamic and less rigid approach. Our report on Performance Management highlighted a move away from annual reviews, and fixed ratings, towards a more fluid and ongoing approach towards the monitoring and measuring of performance. Similarly for pay there is a need to look beyond forced ranking and a fixed merit increase matrix.
Performance-related pay
We have seen more differentiation within performance-related pay, often utilising multiple pay matrices and greater variation in pay increases between average and high performers. There is also flexibility to change outside of annual review, if there is a threat of talent leaving, or to recognise rapid personal development.
One company certified as a Top Employer stipulates a strong link between performance and pay, with a merit increase of up to 12% available for those who exceed expectations. This company set four levels of performance excellence, ranging from those who did not achieve expectations to those who exceed them with different increases attached for each level.
Greater expectations, greater rewards
Another example, a manufacturing business links their merit increases to both the current performance and current pay of individuals. This enables those in lower pay quartiles to accelerate the rate of their pay growth with strong performance. For those already in higher bands, anything less than outstanding performance could see their rate of pay growth decreasing. This strengthens the link between greater expectations and greater rewards.
Not all companies are purely using individual performance to determine increases though. Some favour a more generic guide, such as inflation (77% of participating companies in the international Top Employers certification programmes) whilst group performance is the measure for 40% of participating companies. There could well be cultural issues to overcome in this respect. For some companies there might be a legacy of generic pay awards, particularly during the trading conditions of recent years, which could be difficult to break if employees have got used to them.
Market value
With talent increasingly likely to now move between organisations, there is a need to look at retention, which leads to rewarding individuals by reference to their market value instead of the limitations of company budgets. 93% of participants attach different Compensation & Benefits packages to specific job roles. Similarly, specialist skills are rewarded too. One company certified as a Top Employer, a global professional services firm, uses differentiation in their strategy by offering superior rewards to those employees who have the specific skills that are in high demand from clients. This further demonstrates the impact that market forces are having on rewards decisions.
Cafeteria plan
There is also differentiation through greater flexibility in the range of benefits offered, although progress in this area is moving slowly. Benefits such as flexible hours, job sharing, home working, and travel assistance are all gaining popularity alongside the more traditional offers such as medical insurance, subsidised food and company discount schemes. Employees can customise their rewards, choosing the specific elements and benefits they want, through the ‘cafeteria plan’. However, only 37% of employers in our research offer this approach consistently, and 50% do not offer it at all.
This customisation reflects an emerging trend of suites of benefits and rewards being shaped with different target audiences in mind. Often these are age related (e.g. Gen Y preferences) but can also cater for those with different circumstances and needs (e.g. children or caring responsibilities). In our Compensation & Benefits report, we feature a case study in which demographic changes, and the resulting shifting needs, were important in shaping the reward offering.
Four key trends
‘Increased differentiation in compensation’ is one of the four key trends we have identified in the Compensation & Benefits report. These four trends are shaping the way Compensation & Benefits can be used strategically to deal with talent attraction and retention issues. Each one recognises the variety of ways in which employees now find job satisfaction, be it how performance is rewarded or acknowledging the need for healthier work patterns. Download the full Compensation & Benefits report to learn all about the current trends in Compensation & Benefits and how organisations deal with these trends in their business processes.
