The Fallacy of the Merit Increase: A Chat with Korn Ferry Hay Group’s Tom McMullen

September 27, 2016 Sarah Payne

We sat down with Tom McMullen, senior client partner and North America rewards expertise leader at Korn Ferry Hay Group.

We sat down with Tom McMullen, senior client partner and North America rewards expertise leader at Korn Ferry Hay Group.

When 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?

Many HR professionals are asking themselves the same questions, wondering whether traditional reward strategies like the annual 3% pay bump really makes any difference.

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 part one of his Q&A below.

 

  1. 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.

 

  1. 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.

 

  1. 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.


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