At a time when the cost of basic commodities like eggs and milk continue to rise, many Americans complain that salary increases remain stagnant. In fact, according to research conducted by benefits consulting firm Towers Watson and human resources consulting firm Aon Hewitt, the annual pay raise may very well be dead.
Attempting to take its place is the variable bonus, which is a type of “variable compensation” that allows companies to decrease costs during hard times or to reward employees during good times. This growing trend obviously favors convenience for the employer — whereas raises are permanent, bonuses are only temporary and a better reflection of a company’s year-end revenues.
Some challenges arise, however, when employers replace fixed salary increases with bonuses.
First, it becomes difficult for employees to make long-term financial plans. Sure, there was a hefty bonus this year, but will there be the same for next year? How much do we need to set aside? When future compensation loses its predictability, salaried work becomes perhaps too similar to independent contracting.
Second, despite that bonuses are meant to motivate employees to perform better, they are too often connected to factors outside the employee’s control, such as a downward economy. As a result, bonuses do not necessarily have the intended end result of employee satisfaction and desire for tenure. Instead, as employees change jobs regularly, attempting to acquire better-paying employment each time, turnover rates increase and workforce predictability decreases.
The decline of the annual pay raise may be somewhat offset by recent increases in salary transparency, both in the public and private sectors. Traditionally a taboo subject, sharing compensation information is gaining ground.
For example, beginning in September 2015, the U.S. Department of Labor is now enforcing Executive Order 13665, which prohibits federal contractors from firing or otherwise disciplining employees or job applicants for discussing their pay or the pay of their co-workers. In addition, the DOL and National Labor Relations Board are each implementing rules that restrict employers from limiting employees’ ability to discuss wages and other compensation information.
The underlying rationale behind salary transparency rules is that when pay remains secret, employees commonly overestimate others’ pay, thereby hurting overall job satisfaction. Further, the DOL contends that pay secrecy makes it easier to discriminate, for example, by paying males more than their female counterparts for equal work.
Similarly, beyond the government’s new rules, a private company recently launched a smartphone app, called WageSpot, which “aims to give employees more bargaining power in salary negotiations, and to take the guesswork out of discussions of fair pay,” a company description says. To accomplish this, WageSpot, whose developers “were tired of salary talk being relegated to gossip and whispers,” collects salary data from users, and then systematizes the data by gender, industry, age, job title and geographic location.
Similarly, websites that share salary data, such as Glassdoor and PayScale, give traction to the salary transparency momentum. Thus, as the American business culture transforms, there may be some bumps in the road, such as waning pay raises, but the encouragement of open discussion of wages could, perhaps, be the ultimate game changer.
With this shift in cultural norms, it is a great time for companies to analyze their current compensation structures, not only for basic legal compliance, but also to consider whether variable compensation and other compensation rules may be hurting employees’ job satisfaction. It is hard to argue against the notion that a happy workforce files fewer lawsuits against their employers.
Regardless, this is certainly a dynamic area that forward-thinking human resource officers, managers and other executives should be considering as a part of 2016 policy and practice changes.