A service economy, improved technology and globalization are just a few of the forces shaping the modern-day workforce, yet compensation practices largely remain unchanged, especially when it comes to how employers award raises.
Companies have traditionally viewed workers as a cost, but this mindset is slowly shifting, according to Anthony Nyberg, professor and academic director for the masters of human resources program at the University of South Carolina’s Darla Moore School of Business. Business leaders have often offered the cliché that their employees are among their most important assets, but they’re just now starting to believe it in practice. “I think there’s a greater enlightenment among organizations as to the importance of people,” Nyberg said. More employers are beginning to appreciate the outsized value high performers bring to a business to the point where they’re now legitimately viewed and treated more as an investment than a cost.
Along with this mindset shift comes some changes to how companies think about and structure the way they award raises, experts say.
Traditional practices have been annual raises following a performance review of the worker’s past year at the company.
“In general, it seems to be that the same old practices remain quite common,” Nyberg said. There is a bit more focus on merit increases, and among companies that use a pay-for-performance model, they see higher-quality talent come in and lower-quality talent leave, Nyberg said, which results in overall better human capital and business outcomes.
To motivate top talent further, companies might consider opting for a bonus over a raise, as Nyberg finds that employees respond better to it and companies prefer this from a cash-flow perspective. Why is a bonus more motivating? “People are not really economically rational,” Nyberg said. Workers adapt to a new salary quickly, whereas a lump sum feels more special.
Bonuses aren’t only for individuals, however. Nyberg sees some companies rewarding bonuses based on a team’s performance. This practice might lend itself better to a workplace that places new emphasis on teamwork and collaboration, which, depending on the role, makes it more difficult to discern individual performance.
The removal of numerical performance rankings is another change in recent years that should alter how leaders view compensation increases, said Sanghee Park, assistant professor in the Rutgers University School of Management and Labor Relations. Under a rankings-based system, rankings set by a manager determined the amount of a raise an employee would receive. Some companies, however, found this system wasn’t accurate in paying for performance, which led some employees to be unhappy with their pay.
Managers as Motivators
Without rankings, managers must have frequent conversations to tell if employees are achieving goals and improving. “[These systems] give much more discretion to their managers and let them make decisions in allocating pay raises for their subordinates and for their teams,” Park said. Compensation should be to encourage and motivate workers, she said, and this process of granting raises should help explain expectations to drive workers, their engagement and to show that management cares about them.
However, “the new change can create new challenges,” Park said. Some employees might express that this system is less transparent. There might also be more office politics and feelings of favoritism. These fears keep many managers from removing rankings, Park said.
Greater transparency in the process can help, said University of South Carolina’s Nyberg. The raises don’t need to be equal, but they need to be fair. Employees should understand why they and their peers received the raises they did. “When pay practices are more transparent, it alleviates more problems than it actually causes,” he said. If the process includes both pay and performance, and the reasoning for the raise makes sense, there’s less of a chance that it will upset workers. The problem with this process, though, is it takes more effort than simply paying every worker the same raise.
“A manager has a responsibility to understand the work and the culture of the company, as well as the talent that brings their skills to the work and the workforce,” said Tara Wolckenhauer, vice president of global HR strategy and planning at ADP, an HR consulting company based in Roseland, New Jersey. Managers must understand what their talent needs to be efficient.
When determining raises and other non-monetary compensation, such as career development and flexible work, Wolckenhauer asks her associates how she can help them more and what else they need to be fully engaged in their jobs. This individualized approach is necessary because “one engagement strategy doesn’t fit all,” she said.
These conversations about total rewards should start in the interview process, Wolckenhauer said. Younger generations seek more than money in a job; they often ask about benefits packages, sign-on bonuses and total rewards as well. What Wolckenhauer finds most valuable is a competitive base salary, an ability to show a growth structure and putting together statements of all compensation and benefits to show total worth.
This total rewards structure should be tied to the company’s mission, vision and values, Wolckenhauer said. Then, add unique benefits based on the profiles of people needed at the company.
“What employers need to do is be as predictive as possible toward the jobs that they have while remaining true to who they are,” Wolckenhauer said. It’s important to use predictive analytics to determine this ahead of the interview, thus making an offer most attractive to candidates. “One of the things we have to do is be very futuristic in our thinking,” Wolckenhauer added.
Lauren Dixon is an associate editor at Talent Economy. To comment, email email@example.com.