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Employers assessing salary programs for affordability and competitiveness, Mercer survey shows

As economic indicators slowly climb upward, organizations are beginning to assess the impact that two years of salary freezes and limited pay increase budgets had on their base salary programs. While most organizations have a formal base salary program in place, more than one-third (38 percent) has reviewed their program’s design this year, according to a new Mercer survey. The 2010 Dollars and Sense Survey examines best practices for designing and administering pay programs that ensure competitive base salaries, manage salary increases and control fixed costs. The survey, which includes responses from nearly 550 employers across a broad selection of industries throughout the US and Canada, was conducted in July.

According to Anna Orgera, a principal with Mercer’s Human Capital consulting business, “Base salary is often the largest component of an employee’s rewards and a significant organizational expense. While employees want to know that it’s fair and competitive, employers want to ensure that budgets allocated for base salaries are affordable, sustainable and supportive of business objectives.”

Salary program design. The most common salary program design is the traditional salary structure – one that includes a midpoint of 50 percent of pay, a minimum of 80 percent of midpoint and a maximum of 120 percent of midpoint – used by almost two-thirds (61 percent) of organizations. Less than one-fifth (18 percent) of organizations have a wide salary structure approach characterized by fewer position grades and more extensive ranges than the traditional salary structure. Ten percent use some form of broad-bands.

Additionally, more than half (56 percent) of organizations have two or more salary programs with employee group/job level as the biggest differentiator between programs followed by job family or function and geographic differentials.

To evaluate a job position and determine its salary grade/level/band, most organizations use a market pricing or slotting approach with 37 percent of organizations applying some form of job evaluation such as job levelling/classification, point factor or whole job ranking. Leading factors for determining the approach are objectivity and fairness (91 percent), fit with business model and organization structure (86 percent), simplicity in administration (63 percent) and ease of communication (62 percent).

Moreover, Mercer’s research shows that the most common reward elements linked to salary grade/level/band are annual incentive target and participation, used by 60 percent and 49 percent of organizations, respectively. “We are finding increasing interest among US companies in job evaluation and global levelling,” said Orgera. “These employers are looking for an objective basis for HR decision-making and employee communication. ”

Salary increases. The most common methods to determine employee salary increases are salary increase/merit guidelines or ranges (79 percent) and manager discretion to determine pay raises (71 percent). Less than one-fifth (17 percent) provide cost of living/across the board adjustments.

In line with these findings, merit increases are the most predominant factor included in annual budgets. Typically, organizations determine increases based on multiple approaches such as salary increase/merit guidelines or ranges, formal merit increase metrics and manager discretion.

To manage base salaries, almost half (48 percent) of organizations use an average compa-ratio or the ratio of base salary to the midpoint of the pay range. Two-thirds (67 percent) of organizations apply an average compa-ratio of 100 percent as target. Just less than one-quarter (24 percent) consider time to midpoint – the number of years it takes an employee that performs at expected levels to reach the salary level midpoint – when managing salaries.

Training and communicating salaries. Most organizations train their managers on their compensation programs. According to Mercer’s survey, about two-thirds provide training when the program changes or on an ad hoc/as requested basis. Fewer (40 percent) provide training annually while 11 percent do not provide training at all.

“In just a few years the topic of zero salary increases has become mainstream,” said Orgera. “Employers have concerns about whether their employees will stay once the economy improves and maintaining employee morale despite stagnant compensation is essential. That’s why coaching managers on compensation-related employee communication is critical.”

The majority (80 percent) of organizations communicate information to employees about their base salary program, with more than half conveying base salary philosophy (58 percent) and employees’ full salary range (51 percent).

Source: Mercer; www.mercer.com.