mcmullen-tom-001-357x500When was the last time you looked at a breakdown of your total rewards spend? Are you getting the return—in engagement, motivation, retention—that you’re striving for? What role does peer recognition play in driving engagement?

To get some answers, we sat down with Tom McMullen, senior client partner and North America rewards expertise leader at Korn Ferry Hay Group. We asked him why salary increases have remained stagnant, trends in evolving pay practices, and how transparency is changing some companies’ reward strategies.

Read the full interview below.

 

Why do you think base salary increases have remained stagnant over the last few years?

Base salary increases have been hovering at a median of 3%. This is primarily due to relatively low inflation and a continued cautious economic outlook by many U.S. businesses. Organizations are generally reluctant to unnecessarily increase their fixed labor cost base (i.e., base salary and benefits), but are quite happy to pay for performance via their variable pay programs – assuming they indeed get performance.

 

What are some of the latest trends you’re seeing in companies’ evolving pay practices?

We’re seeing a few things. There is increasing chatter around rethinking the traditional merit increase pool in organizations. Senior leaders in some organizations are convinced they are not getting much value from the 3% being spread across its vast majority of employees.

Organizations are rethinking whether well-paid employees (relative to the market) should be slowed down in terms of their pay increases and the lower paid employees’ pay increase timing being sped up.

On the variable pay side, we are seeing more focus on ensuring the right performance metrics are in place in incentive plans as well as the right weights between corporate, team, and individual performance and between financial, operational, customer, and human capital performance.

We’re also seeing a tighter coupling between talent management and reward processes where more organizations are instituting new key talent reward programs that provide additional base salary bumps if warranted, as well as restricted stock grants or cash awards above and beyond the annual incentive program.

 

How do you see the emphasis on pay transparency changing companies’ reward strategies?

First of all, I would advise organizations to have a component of their reward strategy that articulates the principles around reward communications and transparency. Too often we find that organizations haven’t really thought this through and haven’t included anything in their reward strategies around the degree of transparency in their reward communications.

We also find that many organizations also haven’t engaged and aligned their key stakeholders (i.e., board, leaders, managers, and employees) around this topic. There are multiple facets for reward communications and transparency that should be considered, including:

  • Reward philosophy
  • Reward policies and procedures
  • Program launch communications
  • Individual employee reward communications (i.e., target pay opportunities, salary ranges, benefit values, perquisites, non-financial rewards)
  • Understanding of reward opportunities for other roles

This emphasis on reward communications and transparency will only increase. We have already seen national and state-wide initiatives on gender pay equity, CEO pay ratios, and more transparency on websites around organization practices around compensation market data and perceptions about compensation and benefits.

 

Can you share an example of a company that’s found a mix of reward strategies that’s both cost effective and drives performance?

There are a number of them. A good place to look is at the Fortune Most Admired Company list. Each year, Korn Ferry Hay Group runs this analysis for Fortune and has developed some great insights into what makes these organizations admired, including what differentiates their reward systems.

Most Admired Companies generally strike the right balance in terms of cost effectiveness, organizational performance, a strong culture, and reward programs that are aligned with their business and talent management strategies.

 

What results have you seen from companies that use peer recognition? How do they budget for this kind of reward?

We did a joint study with Globoforce a couple of years ago on this topic. Peer recognition programs, especially when tied to key business priorities (e.g., collaboration, operational excellence, innovation) can really engage the workforce. Organizations need to be serious about the commitment though.

In terms of budgeting for these programs, we saw a tipping point of between 0.5% to 1.0%+ of payroll, where respondents felt the program had real impact. Of course, an adequate program budget is necessary, but not sufficient. Senior leadership support and supporting technology are also key enablers.

 

Which reward programs provide the greatest impacts and ROI for employees?

It’s the classic answer “it depends.” It is difficult to generalize here. For example, employees in lower wage earning jobs typically focus on (and get better personal ROI) on base salaries and benefits. Individuals in higher level roles often prefer career development opportunities, recognition, and exciting work environments.

In past Korn Ferry Hay Group research on management and professional roles, we asked this question and found that senior reward professionals believe that:

  • Non-financial rewards have more impact on engagement (and ROI) than base pay, benefits, and incentives
  • Short term incentives are the financial rewards that have the most impact on engagement (and ROI)
  • Quality of work, work environment, career development, and senior leadership are the non-financial rewards that have the most impact on employee engagement (and ROI)

 

What will pay practices will look like 20 years from now?

I’d be fabulously wealthy if I could predict the future, but Korn Ferry Hay Group recently did a study where we looked at the future of work and the impact on reward programs. The forecasting timeframe on this study was 10-12 years into the future and we found from senior reward leaders a general consensus on the following:

  • Reward systems will be much more diverse and complex given different demands by different employee segments. There will be a need for meaningful and segmented rewards that provide distinction from other organizations.
  • At the same time, appropriately differentiated reward programs within the organization will need to be balanced with less resourcing from HR and more consistent/centralized program management by corporate centers of excellence. Relying on technology and increasingly mobile technology will rapidly increase.
  • There will be continued emphasis on non-financial rewards for retention and engagement such as meaningful role design, career development frameworks, energizing work climates, interesting project opportunities. This implies that organizations will need to build out their employment value propositions, related reward communications, and supporting management tools.
  • There will be more emphasis on clear and transparent reward strategies, processes, and communications for the reasons mentioned earlier.