Show Me the Numbers! Formal Pay Programs Link to Business Strategies
By Jerry Bumgarner, CCP, Director, Research & Compensation Services Cascade Employers Association jbumgarner@cascadeemployers.com
In order to recruit and retain the talent needed to support achievement of business goals, the majority of organizations today establish and maintain “formal” pay programs to avoid the common pay pitfalls of paying too little, paying too much, and/or paying inequitably. These programs are typically characterized by the existence of up-to-date job descriptions, a pay structure (grades and ranges) with a specific competitive market focus, and supportive administrative practices (e.g., starting rates along with regular increase opportunities). While research indicates that pay is typically not even among the top ten reasons why employees stay with organizations, the same research suggests that pay must be reasonably competitive to support employee recruiting and retention needs.
Table A (below) summarizes employer practices relative to the existence of “formal” pay programs within responding organizations (Source: Cascade Employers Association’s National Policies & Benefits Survey):
Table A
Formal Pay Programs
Non-Exempt Production, Maintenance & Service
Non-Exempt Clerical & Technical
Exempt Supervisory, Managerial & Professional
% of Employers with Formal Programs
68%
68%
68%
% of Employers without Formal Programs
32%
32%
32%
Organizations Responding
2,461
2,839
2,875
Table B (below) summarizes employer strategies for the alignment of base pay (wages and salaries) compared to their “competitive market” for talent (Source: Cascade Employers Association’s National Policies & Benefits Survey):
Table B
Pay Strategy
Non-Exempt Production, Maintenance & Service
Non-Exempt Clerical & Technical
Exempt Supervisory, Managerial & Professional
% of Employers Paying Equal to Market
82%
81%
80%
% of Employers Paying Above Market
16%
16%
17%
% of Employers Paying Below Market
3%
3%
3%
Organizations Responding
2,398
2,757
2,801
Employers must have reasonably competitive base pay practices (wages and salaries) to support employee recruiting and retention objectives. Although a strategy to maintain base pay practices above competitive market levels (e.g., the top quartile of the market) may appear to be a good idea, more pay is not necessarily better. Employers adopting such “lead” pay strategies will be stuck with high pay levels in both good times and tough times.
As an alternative, more and more organizations are introducing a variable pay component (incentive or bonus pay) to their compensation mix. Through a variable pay component, employers can vary their competitive pay strategy. When business is good, they can pay in the upper quartile of the market, but when performance is below expectations they may pay at or below competitive market norms.
Table C (below) summarizes responding employer practices regarding the existence and size of incentive plans (linked to individual and/or team performance) within their organizations. This data applies to all industries combined and companies with less than 500 employees and earnings less than $100 million (Source: Cascade Employers Association Research Department):
Table C
Incentive Pay Plans
Non-Exempt Production, Maintenance & Service
Non-Exempt Clerical & Technical
Exempt Supervisory, Managerial & Professional
% of Employers with Incentive Pay Plans
40%
40%
50%
Average Incentive Award as % of Base
4%
4%
8-15%
Table D (below) summarizes the types of performance-based incentive plans used by responding organizations (Source: Cascade Employers Association’s National Policies & Benefits Survey):
Table D
Types of Incentive Plans
Non-Exempt Production, Maintenance & Service
Non-Exempt Clerical & Technical
Exempt Supervisory, Managerial & Professional
% of Employers with Small Group/Team Plans (i.e., Gain Sharing)
18%
17%
16%
% of Employers with Large Group/Team Plans (i.e., Profit Sharing)
40%
41%
48%
% of Employers with Individual Performance-Based Plans
44%
42%
46%
% of Employers with Combined Group & Individual Plans
33%
35%
41%
Organizations Responding
2,405
2,713
2,794
Contact Cascade for a more detailed breakdown of the above data as taken from our National Policies & Benefits Survey. In addition to pay practice information, this comprehensive study includes employer practice data relative to health insurance, retirement, working conditions, paid time off, recruitment, training, and employee relations.
