The past two years has seen the quickest and most dramatic shifts in compensation (aka “rewards”) plans practices ever. In the past two years, we’ve witnessed “the sky is falling” near-collapse of 2008, the “big one” recession of 2008 – 2009 (and 2011?), and the end to entitlement compensation as we knew it (in 2009, when well over 50% of companies reduced and/or eliminated their salary increase budgets for the year).
Now that we’re in allegedly in recovery mode, it is back to normal for compensation/rewards professionals or something else (a “new” normal)? I believe the answer is decidedly “something else.”
Let’s look at what’s happening in some major areas of compensation and rewards, and you tell me if you think we’re getting close to back to normal.
The Labor Market
Wow – what a mess! Over eight million jobs were lost during the recession, and chances are that it will take at least three years or more just to get back to employment levels last seen in 2007. The recent jobs recovery has been tepid at best, and when you take out government and temporary hiring there has been barely any job creation in the private sector. Even though the official unemployment rate topped out at 9.9%, we’ve only dropped to 9.5% and without people dropping out of the labor market in frustration; I would wonder if unemployment has really dropped much at all.
Salary increase and “merit” budgets plummeted in 2009. If you were lucky enough to stay employed and get a pay increase, it was likely quite small by historical standards. Overall, wages rose about 1.5% in 2009 according to government statistics. If you include people who had to take pay cuts to land another job and/or take part-time or temporary work, the aggregate increase is likely non-existent.
With labor market weak and supply far out-stripping demand, wage growth will almost certainly be weak for years. And with healthcare cost inflation continuing unabated; these increased costs will likely chew up most of employers’ payroll increase budgets.
A few high demand areas will continue to do reasonably well. Healthcare should remain firm, and many highly skilled technology jobs are in good demand, relative to supply. Overall though, there just isn’t sufficient job demand to provide the impetus of anything but very slow wage growth in the near term.
Merit budgets will stay at historically low levels and employers are going to have to find other ways to “compensate” for the dearth of extra base pay dollars.
One of the biggest factors impacting employers’ unwillingness to take their foot off brakes on trying to contain fixed costs are the unabated increases in the cost of providing healthcare coverage for their workforces. While healthcare cost inflation has dropped a bit in the past year or two, it’s still running at several times the rate of inflation, as it has been for most of the past two decades.
Don’t expect so-called healthcare reform to save the day (which was in reality mostly healthcare insurance reform). Employers will struggle to manage high healthcare cost inflation with competing compensation dollars for the foreseeable future.
One area that should show a nice rebound is in funding for (and payouts of) short-term cash incentives (often referred to as “bonus” programs). The trend towards greater spending on short-term variable pay programs continues, despite a significant hiccup on 2009.
Budgets for variable pay have more than doubled as a percentage of payrolls since the early 90s and have continued to move slowly upwards over the years. Hewitt predicts 2010 variable pay budgets will be between 11% and 12% of payroll, and forecasts 16% in 2020. Of course, no one has a crystal ball, but I’m certain we are moving in that general direction.
Increased variable pay for results, rather than a return to more normal levels of merit pay for the masses are the general direction I see cash rewards going in the private, for-profit sector of the economy.
Long-terms incentives, typically provided in the form of stock/equity grants have been trending downward for non-executives for a few years now, starting well before the recession hit. During the bear market for stocks everyone who received equity grants took a hit, but while stock-based compensation for executives may well rebound fully, they won’t below the executive level, for a variety of reasons.
In the post internet bubble, post stock expensing world, the broad-based use of stock options has been declining for the past few years. According to one study, the use of options in large public companies has dropped from 92.5% in 2004 to 77% in 2009. And while some other equity vehicles such as restricted stock had been on the rise during the same time period, their increase won’t make up for the overall decline in equity levels that peaked early in the new millennium.
In addition to the reasons mentioned above, shareholders groups are generally unhappy with high burn rates (shares granted each year as a percentage of shares outstanding), high overhang (potential stock dilution from employee stock grants), and in some case the huge dollars that are spent re-purchasing stock to counter dilution from employee stock grants (in public companies).
General Trends in Equity Compensation
|Equity||General Trend for Non-Exec.
||General Trend for Exec.
|Performance-Based Equity Vehicles||Uncommon for this group, but could have a future as compensation plans become for performance oriented in general.||Currently the fastest growing equity vehicle for executives.||The trend is up for performance shares|
|Stock Options||Declining in both grant size and prevalence. A reduction in grant eligibility to lower level employees continues.||Still common, but restricted stock and performance shares are becoming more prevalent.||Broad-based equity plans (stock to nearly everyone) have been in decline for a few years, especially since expensing took effect.|
|Stock Appreciation Rights(SARS)||Uncommon for this group||Not commonly used, but in a slight upward trend for smaller public companies.||Becoming more common for use as options-like vehicle with less actual shareholder dilution than using options alone. Stock-settled SARS (stock appreciation that is paid in whole shares of stock) can be utilized to keep cash requirements low, with less dilution than options.|
|Restricted Stock/RSU’s||Becoming more and more common for non-executives.||Had a big surge in the 2004 – 2007 period, but growth has slowed since then.||Some tech sector stalwarts (e.g. Microsoft and Amazon) use restricted stock exclusively for their non-executive equity grants.|
The 2010s may well become the era of non-dollar denominated rewards, or “qualitative” rewards, as companies strive for ways to retain and engage their workers. With relatively few new fixed compensation dollars to going into workers pockets, these more qualitatively oriented rewards focused more on employee development, worker psychology, corporate culture and the like are going to be the next wave of rewards, in my opinion.
After many years of increasing demands on workers, many in workforce today are fed up with the “doing more with less” trend. Multiple workforce studies conducted in the past few years have shown declining morale, commitment and engagement with work, and north of 50% of employees that claim to want to change jobs for the proverbial “greener pastures.”
With the general decline in morale and worker commitment, efforts to enhance and improve the work experience are where the action is focused within more forward-thinking organizations. The graphic below summarizes my thinking on the general direction of rewards from thinking only about “quantitative” rewards (dollars, incentives and benefits) toward more “qualitative” ones.
FUTURE REWARDS THINKING
We would love to hear your thoughts on where you see rewards heading.
Doug Sayed is principal at Applied HR Strategies, Inc., a Seattle area compensation consultancy and developer of the StrategicPay Series, a series of “do it yourself” compensation guides. Applied HR Strategies is also partnering with the WTIA on the development of the new WTIA Salary Survey, due to be launched this fall.