In a previous Mercer blog on inflation’s impact on total rewards, we divided our recommendations into actions to be taken now and decisions to be considered later.  The “later” category included finalizing the annual compensation planning program that typically occurs in Q1. In this blog, we’ll focus key considerations and market practices based on the most recent global research.

Still too early for some

 

In September, when employers across 103 countries were asked when they were finalizing their budget, the most popular response was November, followed by December. For instance, approximately one-fourth of companies plan to finalize their budgets in December in Ghana, Poland, and New Zealand. Whereas approximately one-fifth of companies plan to finalize their budget in December in Canada, India, Italy, South Africa, and the US.

 

There is a tradeoff related to when an employer finalizes plans. Finalizing early satisfies budgeting and financial planning requirements and program planning (system configuration, socialization, training, etc.) has fewer variables for which to account. Delaying plans affords the employer the opportunity to consider the very latest market trends (Mercer’s Global Compensation Planning report is updated quarterly) and economic factors (inflation, job growth, etc.).

Clarifying objectives

 

We worry that some leaders and employees have unrealistic expectations of the upcoming compensation planning process. Accordingly, they are expecting the annual process to address inflation, the great resignation, market competitiveness, performance, and the retention of hot skills. Because of this, it is important to clarify the objectives of annual base pay increases.

 

  • Cost of Labor vs. Cost of Living. What have you communicated in the past? Have you used language like “annual increases are provided to keep people whole” or the acronym COLA (Cost of Living Adjustment)? If so, your employees may have the expectation that your increases will match the latest inflation figures, requiring significant and thoughtful communication, as most employers are basing their increase budgets on cost of labor, not cost of living. Globally, we see relatively higher budgets for populations lower in the organization, which is one tactic employers are using to support populations that are most vulnerable and hardest hit by inflation.

  • Pay for Performance. What is your commitment to reward performance with base pay increases? How did your organization perform? Does the budget reflect that performance? Do your incentive and recognition programs do a better job of rewarding performance and how do you communicate this?

Strategies in play

 

Our global research indicates there are many different strategies being planned for the upcoming compensation planning process.

 

  • Targeted lump sum payments are being considered by 15%. Regardless of how large the lump sum payment is, they must be delivered IN ADDITION TO and not IN LIEUE OF base pay increases. This is not the right time for companies to decrease their long-term market competitiveness by deferring base pay increases. Prior to recommending any form of lump sum payments, consider the impact on cash flow for the organization. While lump sum payments have a favorable impact on long-term cost containment, they have an unfavorable impact on cash flow, especially if delivered early in the fiscal year.

  • 36% are considering delivering multiple or more frequent increases throughout the year. Do the multiple increases work together to keep employees market competitive or are they designed to advance/improve market position? Does a second increase reduce the size of the first increase? These are a few questions to consider, in addition to potential impacts to the financial run rate and incentive award calculations.

  • 57% of companies indicated they were reviewing structure ranges for targeted population. Due to demand for new skills and rapidly changing marketplace, it is reasonable to assume the majority of those companies identified some opportunities for improvement. For ranges that need adjusting or jobs that need to be reassigned, do those actions occur before or simultaneously with the compensation planning decisions? Will the required market adjustments exhaust the annual budget or was there a separate market adjustment budget secured at the time of the structure review? If the increases coincide, how explicitly will the targeted market adjustments be communicated relative to the more general annual increases?

  • Along the same lines as targeted market adjustments, compensation teams typically have the opportunity to review, calibrate, and adjust leader increase recommendations prior to finalizing them in the system. In addition to the typical audit and reporting that involves identifying increase percentage outliers relative to performance, range position, and date of last increase, compensation teams are now able to review increases through the lens of skills and guide investments in the talent with the skills deemed critical for the future. With increased knowledge of skills corresponding to each job and/or held by individuals, remaining budget or a pre-allocated budget can be used to ensure those with critical skills are receiving at or above market adjustments.

  • 45% of employers indicated that they plan to increase transparency in their compensation program. While some employers are being reluctantly prompted by regulations, 37% say they would be moving in that direction regardless. For most of the year, it’s hard to get the attention of employees and leaders, but during the annual planning process, the light typically shines bright on the rewards team. Therefore, is this compensation planning cycle the right time to make those first steps toward increased transparency? Your next step may be to take the annual increase process out of the “black box” and more fully explain the rationale of the decisions. Or perhaps your next step is to join the 15% of employers who proactively share the individual’s full range with the individual or join the 7% that disclose the full range structure with everyone.

Rise of the Relatable Organization

 

As reported in Mercer’s Global Talent Trends Report, employees are expecting employers to stand up for what they value and relate to them through genuine dialogue about their value and their future. This upcoming compensation planning season presents an opportunity to reward, recognize, and strengthen trust with employees. These can be achieved through strategic prioritization of objectives and empathetic communications.

Allison Griffiths
Allison Griffiths

Toronto Career Business Leader

Brian Fisher
Brian Fisher

Global Skills & Career Frameworks

Chris Perrett
Chris Perrett

Pacific Workforce Solutions

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