Variable pay continues to be the focus in cash compensation planning. The recent softening of the economy is not likely to change this picture. If anything, firms will seek to reduce costs, and in particular, fixed costs which equals trying to place still greater emphasis on incentive compensation. But there are limits to how far firms can push in this variable pay direction.
Examining the big picture over the long term shows a sharp upward trend in the use of variable awards. In 1991, according survey data gathered by Hewitt Associates, company spending on variable pay for salaried exempt employees amounted to a meager 3.1 percent of payroll. By 1995 this amount rose to 7.6. For the year 2000 spending on incentive awards was over three times as high as in 1991 or 9.7 percent. This amount is projected for 2001 to reach 10.2. Moreover, in 1990 47% of companies reported having at least one incentive pay plan; today this number is 78 percent.
On the other hand, base salary increases, overall, have been modest in recent years. There is no notable change anticipated for 2001. Salaried exempt employees are projected to receive an average increase of 4.4 percent. Salaried nonexempt employees, likewise, will get 4.3 %, given current plans. For executives the increase is expected to be 4.5 percent.
But don't let these percentages bamboozle you into complacency. Companies are still slugging it out for talent. The overall percentage increases in base salary hardly tell the real story. Creative and jumbo-size compensation packages have become a way of life on the bloody battlefield for brain-power over the last several years. How much will this 'attract and retain at whatever it takes' warrior mentality be cut back if, as hard numbers are revealing, the economy is downshifting?
We will see, but the odds are that pay will play its usual lagging indicator role. So don't expect surveys to provide you with heads-up news flashes.
Since so much emphasis has been placed on variable pay, a shift in the economic fortunes of firms means we are probably in for a period of rethinking compensation strategy and incentive plans.
Organizations that have placed emphasis on funding bonuses based on continuing top and bottom line growth may find themselves in a weakened posture for keeping key talent, let alone attracting it. Add to this picture the amazing fall from glamour of stock-based plans, and the challenges for compensation will be all the greater.
The upshot would seem to be downsizing. And we are starting to see some companies heading down that lighten-the-load road now. But wait...with many organizations already veterans of the 'get lean and mean' campaigns of the early to mid 90's, downsizing will prove, for many, to be a very limited and short term approach at best.
The currently tight labor market may already be softening for talent in some sectors...and for some functions; we are picking up anecdotal 'blips' of this on our early warning radar scope. Expect the really 'hot job markets,' however, to stay that way for some time, barring a replay of the early 90's. Even if the road gets really rough, technology will be paving the way back in very large part, so demand for tech-talent should stay stronger than one might imagine. The strong will stay on the cutting edge.