Executive Summary: Compensation Trends

Date: December 20 2006

With salary budgets forecast to remain slim for 2006, employers can expect to continue facing the dilemma of
stretching compensation dollars to both attract talent and effectively reward top performers. Average salary increases
will remain under 4%, and established salary ranges for jobs will be tweaked by only 2.5%, leaving nonmonetary
rewards in the spotlight.
When the economy tightened, merit pay systems fell in popularity due to their inability to adequately differentiate
among performance levels. The concept of "total rewards," first suspected to be just another buzzword, is now
embraced as a strategy, especially when it can be tailored to individual preferences. Although the components of a
total rewards package can differ from one firm to the next, the package often hinges on base pay as the cornerstone,
supplemented by variable pay, core benefits, pensions, voluntary benefits, training, development, recognition and
even work environment.
The most popular monetary compensation tools are sign-on bonuses (64%), employee referral bonuses (63%) and
market adjustments (60%), according to WorldatWork's 2005/2006 Salary Budget Survey. Individual spot bonuses
and retention bonuses round out the five top-rated programs, offered by 43% and 30% of surveyed employers,
respectively. One-quarter of employers use stock options, 19% use group incentives and 17% offer project milestone
or completion bonuses. Mercer Human Resource Consulting's 2005/2006 U.S. Compensation Planning Survey
reported that rewards such as sign-on bonuses, spot cash bonuses, project milestone awards and better pay
increases are more likely to be used for IT positions than other types of jobs.
While linking pay to goal achievement is an important aspect of most compensation strategies, there are advantages
and disadvantages to various approaches. An "all or nothing" plan inspires diligence but might also encourage
shortcuts and can be discouraging to those who miss by a hair. Tier systems sometimes cause employees to stop
short rather than stretch for the next level. And a subjective bonus granted after the fact can lead to grumbling by
some, but it allows managers to recognize special circumstances.
Pfizer Pharmaceutical Group Canada is one firm that ensures corporate goals cascade down to affect individual
employee behavior. Bonuses are tied to three levels of achievement: overall organizational performance, team
performance and individual performance. While upper-level employees' bonuses are more heavily weighted toward
overall company performance, other workers' bonuses are more heavily influenced by individual performance. Luc StPierre, VP of human resources, said, "Incentive plans are a communication tool. We're telling people what is
important enough to reward - and reward significantly."
And in today's high-pressure work culture, employees need a better reason than competitive pay for continuing to
invest their human capital in the workplace. According to the Society for Human Resource Management's 2005
Reward Programs and Incentive Compensation Survey Report, incentive plans, monetary rewards and nonmonetary
rewards are all more effective at retaining top performers than they are at recruiting. A study by the Incentive
Federation reports that, while cash bonuses are sometimes viewed as entitlements, noncash incentives such as
merchandise, travel awards and other individualized incentives are likely to hold more appeal.
Such customization may be one method of developing more effective compensation strategies. New Zealand's Dr.
Angela Bowey, a specialist in organizational research, says, "The key to success may be extensive consultation,
allowing employees to adapt their expectations to the rewards available, while having some influence on the features
of those rewards."
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