Farewell to Across-the-Board Increases

By Bridget Quigg, PayScale.com Everyday PayScale’s sales team, account managers and executive leadership talk to HR professionals about what is and isn’t working in compensation. We sat down recently with PayScale’s Chief New Business Officer, Dave Smith, to find out what he has learned from our customers and why he’s convinced that across-the-board increases are dead.

Q: Where do you see the greatest change in compensation practices?

A: I see a move away from “same as last year” in a number of areas, especially across-the-board increases. It used to be that across-the-board increases were common. People aren’t really using them much, anymore. That is because the world has changed, particularly since the economic shift of 2008.

Have you seen the graphs previous to 2008 of the GPD going up, then down a bit? Profits would go up, then down a bit. Employee pay, same thing, it would go up and then down a bit.

Right now, profits and GDP have turned back up but employee pay has not recovered. This is a massive shock to the system. And, in that environment, you can’t just take last year’s comp budget, bump it up by 3 percent and dole out that cash evenly across the board.

Companies are getting much more strategic around questions like, “Where am I going to give out the increase? Who are my employees whom, if we lost them, we would be in trouble?”

That “same as last year thing,” by the way, actually comes from a conversation with a customer of ours. She said, “SALY doesn’t work anymore.” I asked, “Who was Sally, again?” figuring that she fired someone by that name. But she let me know that “SALY” stands for “same as last year.”

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It’s interesting. HR professionals are reacting to a new reality. The people that our customers are hiring right now are expecting less money, in general. Some are expecting more, depending on what is going on. But, in general, they are expecting less money than the people job hunting three years ago.

It gets tricky for employers because you have people who you are already paying well, then you bring new people in and pay them less. Sooner or later they are going to figure that out. So, doing a continually increase, as they were for a long time, doesn’t work anymore. The pay plan has to be more strategic and reward contributions in order to keep workers motivated.

Q: Could employers pay more but are just taking advantage of the fact that people have low expectations around pay? Or, can employers truly not afford to pay more?

A: I imagine it is more the latter. We went through an experience where there were layoffs, there were freezes and, in some cases, people’s pay actually got reduced. And, employers took that Draconian measure because they weren’t prepared for a downshift in the prospects for their company.

Once that kind of thing happens, you start shifting more towards a pay-for-performance model so that people’s base pay is not increasing as fast as it has in previous years. That way you don’t get caught with a comp structure that is massive and forces you to lay a bunch of people off.

A better scenario is one where a lot of people’s pay is variable and is based on the prospects of the company. That way, if the company doesn’t do well, it’s much easier to adjust. You don’t have to take drastic measures to account for it.

Q: It sounds like compensation professionals are preparing because they know another economic down shift is possible.

A: Yes, in fact they know it’s probable. You can look at The PayScale Index and it says this stuff in spades. Or, you can look at the government indices. You see before the recession that we had a steep, even increase in revenue; a steep, even increase in employee pay and an even steeper increase in profits, due to a healthy trade off of human beings for technology. Then, all that started changing really, really fast.

Those regular, gradual increases in pay don’t happen as much anymore. In some places they do. Seattle still is a pretty hot area for technology companies compared to elsewhere. Pay here didn’t drop as dramatically as elsewhere but companies here didn’t have as many problems as companies in other places.

If you look at Arizona, places where there are massive bubbles, they are going through massive reorganizations in how people get paid and why they get paid what they get paid.

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