As a new year approaches, business leaders are making final decisions about how to adjust their compensation approach for 2018. As they do, I hope they are paying attention to the trends driving employee rewards strategies in the increasingly competitive talent marketplace that currently exists. If you’ve followed this column at all throughout the year, you know that trends in talent recruiting and retention, performance management, employee engagement and employer branding require all business leaders to adopt a fresh view of the value proposition they are offering. Competitive pressure to have a superior pay offering in particular is intense and that intensity is only going to grow. As a result, you will want to be in tune with where businesses are headed with their pay strategies over the next 12 months—and beyond. And then you will want to adjust your approach accordingly. So, here is a preview of five 2018 pay trends you should be aware of and adopt.
1. Emphasize salary increases less and value sharing more. WorldatWorld forecasts that global businesses will offer modest salary increases to their employees next year (3%). Why do you suppose that is? Enterprises are scaling back on salary increases and other large, guaranteed pay commitments because we are living in the age of value creation. Most companies are adopting a compensation philosophy that says they will be “competitive” with salary offerings but that upside earnings will come through pay plans that reward short and long-term performance. They are spending time determining how value creation is defined in their businesses and rewarding their people once the company reaches a certain threshold of not just profit, but productivity profit—a level of net operating income attributable to the contribution of human assets at work and not just production from existing capital assets within the business.
2. Create highly agile pay strategies. This trend is tied to the revolution going with performance management. Organizations are moving away from formal employee appraisal systems and towards more flexible mentoring and coaching approaches. This is happening because the pace of change in business is demanding that organizations be able to adjust and adapt quickly and in an ongoing fashion. Compensation approaches need to align with this new reality. This does not mean organizations need to develop a brand new pay strategy every quarter. Rather, they organize their rewards commitment as they would an investment portfolio with different asset classes. As business realities drive different demands, the compensation investment “portfolio” can be reallocated or rebalanced, but need not be reinvented.
3. Adopt a total rewards approach and create a total employee experience. Companies are positioning compensation in a broader context by focusing on building a comprehensive experience for their workforce. Total rewards means that pay is treated as just one of four areas of a broader value proposition the organization offers. Beyond pay, it communicates a compelling vision of the company’s future—emphasizing the role each employee (business partner) has in its fulfillment. It nurtures a confident, performance-focused culture—where every employee works within the realm of his or her unique abilities alongside others who align their efforts to form a unique team. It provides opportunities for personal and professional development—by exposing employees (business partners) to resources and experiences they couldn’t access elsewhere. And it offers financial rewards that reinforce a unified financial vision for growing the business—where all stake holders benefit from the wealth multiple the company produces.
4. Create "accountable" pay strategies—demanding that compensation generate its own ROI like other capital investments. If shareholders are investing $1 million in their top four people, they want to know what they are getting for it. And they deserve to know. It should be likewise with the investment the company makes in all of its employees. There are ways to account for the amount of profit being generated by the efforts of your workforce and for comparing that figure with the total investment you are making in rewards. That ratio can be calculated each year and then tracked over time to ensure it is increasing. We call that measure the Return on Total Rewards Investment—or ROTRI™ for short. One CEO client of ours considers ROTRI™ to be the most important performance metric he tracks.
5. Foster a partnership relationship and use pay as a tool to reinforce it. In a business partnership, owners share in the risk and rewards of trying to grow the business. If things go well, they all participate in the upside. Similarly, downturns result in a shared vulnerability. Each partner in the business typically assumes a level of stewardship for certain outcomes and holds himself or herself personally accountable if those results are not achieved. It should be no different when it comes to your employees. Treat them as growth partners in your business and tie their earnings opportunities to the outcomes associated with the stewardships they have. Then, consistently communicate and promote the value proposition in which they participate so they become convinced of the partnership commitment you have with them.
These are just five of many trends companies are beginning to follow in their approach to pay. However, if you focus on at least these five, you will find compensation will be a better driver of the high performance culture you are trying to develop.
Pay will continue to be a strategic tool all business leaders must focus on if they expect to sustain a competitive advantage, not just in 2018 but far beyond.