North American firms are now offering bonuses and variable pay as a means of
avoiding high fixed costs in a time of economic uncertainty. Charlene Solomon
In spite of the current slowdown in economic activity in North America,
salaries will continue to edge upwards. Over the past couple of years, salary
increases have averaged between 4 and 4.5%, which is about 1-1.5% above the
consumer price index. This may seem to be an interesting phenomenon, given the
tight labour market and shortage of qualified workers in North America, but it
makes sense in the overall economic picture.
The real trend is the increase that is being seen in incentives and bonuses.
"Companies are including more people in incentive and bonus arrangements,
and also giving them greater opportunity," says Steven Gross, employee pay
practice leader for global consultancy William M Mercer. In fact, depending on
the industry and the specific company, all levels of employee are being
included in these variable compensation programmes. It is not that uncommon for
administrative assistants and secretaries, for example, to participate in these
There are several reasons. First, incentive and variable compensation plans
share the wealth in good times. Similarly, they are able to contract easily in
poor economic times. Second, incentive plans communicate what is really
important. They are adaptable, and they can emphasise what senior management
believes are the most important activities.
"When actions are compensated, the message is that they are really
important," says Gross. "The message is, ‘this is what is really
important to the company and to the extent that if we’re successful in this endeavour,
employees share in the success’."
For example, a company may preach quality as being the most important
factor, but pay for productivity. This incongruence gives more than a mixed
message: it actually tells employees that productivity is what is valued.
Progressive companies are consistent.
According to research by international consultancy Watson Wyatt Worldwide,
Playing to Win: strategic rewards in the war for talent, certain monetary
rewards are on the decline, such as paying salaries that are above market and
paying technical pay premiums. Playing to Win reports that there are small
increases in group incentives, project incentives, exempt overtime, stock
options and grants.
In addition, the survey reveals that non-monetary rewards are increasing.
For example, advancement opportunities rose from 60% in 1999 to 76% in 2000.
Likewise, flexible work schedules and opportunities to learn new skills rose
dramatically, from 64 to 73% and 62 to 68% respectively. Career development,
opportunities to work at home, job redesigns and reduced length of the working
week all scored higher percentages in 2000 compared with 1999.
Furthermore, another unusual phenomenon is occurring – labour unions are
starting to find these compensation practices acceptable for their members.
This is very new in the US especially, where it is unusual for labour to align
itself with corporate shareholders. This is part of the more positive
relationship that is developing between workers, management and company owners.
As people begin to see this burgeoning relationship, it reduces the adversarial
qualities that have existed for so many years between unions and corporations.
It is a win-win-win situation.
Why is it that the US and Canada are now moving towards these kinds of compensation
practice? First, both countries are suffering from an extreme labour shortage.
In addition, individuals find that their opportunities are not limited by
gender or ethnicity. However, at the same time, companies are wary about
raising salaries because of a possible recession or downturn. Therefore they
are offering signing-on bonuses and variable pay. They don’t want to be locked
into high fixed costs.
In contrast with Europeans, who do have high fixed costs, North American
companies are creating more risk for employees. In good times, the pay is
better; but in a soft economic environment, they won’t lay people off, they
will simply reduce some of the variable pay.
All told, the compensation and pay situation in the US is not changing
dramatically. What is different is the type of compensation that people are
receiving – and expecting. What this bodes for the coming years as the labour
shortage continues remains to be seen.