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June 07, 2006
Trends in Employee Compensation

By Pat Grzybowski

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Globalization, outsourcing, movement from manufacturing to a service economy, and sluggish economic growth have all affected employee compensation over the last five years, said Robert Skladany, a principal at Wellesley Consulting, who spoke at the Connecticut Business and Industry Association's 2006 Compensation and Benefits Symposium.

Low inflation and a flat economy have given employers an advantage, said Skladany. Employees have had limited expectations as far as pay increases are concerned and unions have been less effective in influencing the workplace. At the same time, growth in the use of a contingent workforce made up of outsourcing providers, independent contractors, part timers, home workers, temporary staff, and retired employees has been outpacing real workforce growth. Finally, employers have been dealing with double digit increases in healthcare and pension expenses.

Skladany said that these trends are being reflected in compensation structures. He said that there is a definite market linkage to base pay and believes the structure of base pay systems is reverting to more traditional pay practices. One way this is manifesting in compensation programs is a move away from broad banding to traditional salary grade structure with a minimum, midpoint, and maximum. He also noted that the current merit spending pattern is around three to four percent annually. In the pharmaceutical, medical supply, and utilities industries, Skladany said, some employees have seen merit increases as high as four to five percent due largely to shortages of qualified employees and increasing demand.

Skladany also discussed consistency and fairness in base pay structures. In this era of small annual increases, Skladany said, employees feel that "If you can't pay me more, pay me fairly." Therefore, internal equity and pay for performance are becoming even higher priorities and things like broad banding, skill based pay, cost of living increases, and lump-sum merit payments are on their way out. On the other hand, growth has been observed in management incentives, key staff incentives, and multi-year cash-incentive plans.

The focus for incentive plans, said Skladany, will be on individual and team plans related to commissions, piece work, and small groups. He also noted that there will be unit and enterprise plans consisting of management incentives, key staff incentives, and multi-year plans. Multi-year plans emphasize the achievement of long-term goals.

Finally, work/life balance has become important to many employees, particularly due to the rise in two wage-earner families, said Skladany. Employees are trading off pay (due largely to flat salary increases) for work/life balance. Rather than the strictly structured seven and a half to eight hour a day schedule Monday through Friday that has dominated the workplace for many years, flexible work schedules are seen by employees as a way to achieve more of a balance. Some employers are now trying a nine hour day every day for nine days with the tenth day off or a ten hour a day schedule four days a week with the fifth day off to offer the employee flexibility.

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