It’s Time to Kill Merit Increase Processes and Salary Budget Surveys – What Better Time to Start Than Labor Day?

Fred WhittleseyConscious Compensation: The Impact Compensation Blog, Pay and Performance: The Compensation Blog

Fred Whittlesey
Compensation Venture Group, SPC

An oversize postcard in my mailbox today – yes, a real physical heavy stock paper postcard – is touting the value of the 44th annual salary budget survey from a compensation professional association. The pitch says that this survey “will provide the knowledge you need.” If I told you that the message on the post card was about as contemporary as the medium, you’d think I was just using hyperbole like a writer of a bad novel.  But this is true, and it’s life imitating that bad art. The medium screams “out of date” as does the message.

Any methodology, particularly in the field of compensation, that is 43 years old (yes, that arithmetic is correct) has the potential to have limited value. People who have been working in the field for a good part of that time have some perspective on such methodology.

The premise of this survey is that employers can see what other employers are planning on budgeting for “merit increases” and overall “salary increases” in the coming year. For many years (decades) now, I have been advising clients that this data, and this mentality, are a fallacy.  Here’s why.

1 – Organizations spend an inordinate amount of time conducting individual performance evaluations and then attempting to use those evaluations to allocate scarce salary increase dollars. Long story short, this results in most employees being told that they are “above average” (i.e., rated a “4” on a 1 to 5 scale) and then receiving an average salary increase.  This absurdity is well-documented and I have seen individual organization data on this for dozens of clients. So salaries increase, on average, 3.0% for everyone (in the US). This has been true for about 10 years. And people are told that they are above-average but, on average, receive an average salary increase.  This has been true for at least 30 years.

2 – Next, over the ensuing months, managers engage HR in a series of requests for “off cycle increases” and “one-offs” and other such actions for increasing employee salaries.  Very few organizations budget for these, and the data is not captured in salary budget surveys. In these cases, salaries increase by anywhere from 5% to 10%, on top of the budgeted 3% increase.

3 – Then, there are promotions.  You know, when a Compensation Analyst gets promoted to Senior Compensation Analyst.  Their job didn’t change, they’re still sitting at the same desk doing the same work, but they have now been here for a year or two so they are “promoted” and that is good for another 10% or 15% increase. This is addressed in salary budget surveys, but always underestimated.

4 – Ultimately, 10% of the employees leave and replacements are hired at rates usually above the departed employees’ salary levels. This too is not captured in salary budget surveys. It could be measured, but that would be a lot of work despite how valuable that data would be.

The net effect of this is that the actual expenditures are completely out of line with the salary budget survey data.  That would drive a CFO crazy, and that is what happens.  HR loses credibility. A budget is a budget and all of these “exceptions” are not within budget.

Now, remember that 43 years ago very few employees were participating in short-term incentive plans.  And only executives were included in long-term incentive plans (except in some revolutionary Silicon Valley companies).  Fast forward to 2017.  The majority employees in the US are on a variable pay plan and, in the tech and biopharma sectors and on the West Coast, virtually all employees receive equity compensation.

Given all of the above, why are organizations spending any time and effort attempting to deliver pay through base salary “merit increases” based on an antiquated salary budget survey? Yes, that was the only tool in the 1970s. But this is not 1973 so lets stop behaving like it is.

The purveyor of the sender of the postcard may have said it best in a separate communication:

“Compensation is one of the most important aspects of business, but it’s been decades since the industry has seen any real change.”

Exactly.

So, ditch the salary budget survey, ditch the merit increase process, focus on valid and contemporaneous market data, deliver performance-based compensation through annual incentives and equity awards, and get back to business.  Stop this insanity of “merit increases” and related absurdity.

And with that, we can eliminate the oversized paper postcards and thus improve environmental responsibility; free up managers’ time to manage the business instead of sitting in meetings with HR; and move forward.

It’s not 1973, or 1983, or 1993, or 2003, or 2013.  Move forward.