More than ever, when it comes to pay, it's not just what you
do, but how well you do it.
New research indicates that workers from low-level service
employees up through the executive ranks can once again expect only moderate
raises in base pay for the coming year. In a survey of 227 midsize and large
employers to be released today, New York-based Mercer Human Resource
Consulting found that companies expect to dole out average annual pay raises for
2007 of 3.6% to 3.7%.
The real money will instead come from performance-based pay
raises and incentive bonuses. Mercer's survey found that about three-quarters of
employers expect bonus payouts for 2007 (based on 2006 performance) to be equal
to or higher than the bonuses paid last year. And while the biggest payouts as a
percentage of pay will go to the most senior people, companies are also
expanding the number of workers eligible for a bonus. Executives who receive the
highest performance rating can expect bonuses equal to about 47% of their
salary; service workers with the lowest ratings can expect a bonus of about 3%.
Mercer's findings echo similar trends reported earlier this
fall by
Hewitt Associates Inc., a Lincolnshire, Ill., human-resources consulting
firm. In that survey, Hewitt found that 80% of companies now offer a bonus plan,
up from 78% last year and just 67% in 1997.
Moreover, the numbers confirm what Sibson Consulting is seeing
as its human-resources clients increasingly seek to put the "merit" back into
merit raises. Jim Kochanski, a senior vice president at the New York firm, says,
"Merit raises are just taken for granted these days, and a lot of companies are
trying to get away from that. They're getting back to saying merit should be
about merit, not just an across-the-board raise each year."
Companies have been increasingly tying pay to performance in
recent years, in an effort to keep their fixed expenses as lean as possible, yet
at the same time rewarding the most valuable workers. That provides companies
the flexibility to rein in costs during tight years but to share the profits
during abundant years.
Burns & McDonnell, a closely held Kansas City, Mo.,
architectural, engineering and construction company, has operated this way for
years. The company historically ties pay raises to the rate of inflation, but
gives annual bonuses to workers throughout its ranks. The higher up the ladder
an employee goes, the more that employee's pay is tied to the annual bonus. New
hires can earn bonuses of as little as 10% of pay, while senior engineers who
achieve "outstanding performer" ratings can earn bonuses of well over 100% of
their fixed salary.
Burns & McDonnell's bonuses for 2006 went out to most employees
last week, and "it was a phenomenal week around here," says Mark Taylor, a vice
president and the firm's chief financial officer. The bonus pool was up more
than 40% over last year, Mr. Taylor says.
"Our philosophy is that if we paid everyone a minimal bonus and
put all their compensation [in their salary], you're not going to get phenomenal
numbers in terms of pay; everyone's [salary] is going to be right at the
market," Mr. Taylor says. "But if you put some of that pay at risk, then workers
see that they can make well above the market," depending on how strongly they
perform in a given year.
Mercer's survey indicates that companies are increasingly
"segmenting their work forces based on performance," and that those performing
at the highest levels are pocketing the biggest bonuses and raises, says Steve
Gross, Mercer's global-reward practice leader.
This is true even in base pay. The relatively small group of
workers rated highest by their employers is expected to receive average base-pay
increases of 5.4%, according to Mercer, while raises for those in the vast
middle tier of workers are expected to be about 3.3%. The much smaller group of
weakest-rated performers are expected to receive pay raises of about 1.4%.
Companies are also increasingly differentiating between
employee segments, paying more people in departments that represent "core
functions," says Mr. Gross.
"They're not just looking at IT workers against other IT
workers," says Mr. Gross. "They're looking at all segments against each other
and asking, 'Which functions are we willing to pay more for?' " Mr. Gross says
companies are now concluding that they "want the best and the brightest in
certain jobs, and are willing to pay for that, and just want adequate employees
in another job." In doing so, he says, they're determining that "all my children
are not created equal. Companies are more comfortable now not just giving
everyone the same pay raise."
