Mercer’s Mary Ann Sardone discusses salary increase trends and how employers can rethink compensation to retain top employees in a tight labor market in this interview with the Wharton School’s Peter Capelli on SiriusXM Business Radio.
Peter Capelli (George W. Taylor Professor of Management at the Wharton School and Director of Wharton’s Center for Human Resources) and Greg Shea (Adjunct Professor of Management at the Wharton School) speak with Mary Ann Sardone (Partner at Mercer) about salary increase trends in the United States and how employers can retain their top employees in a tight labor market by rethinking their approach to compensation, performance management and total rewards strategy.
Originally aired on SiriusXM Channel 132, Business Radio Powered by The Wharton School on January 10, 2019.
Listen to the interview here:
Peter Capelli: It's a tight labor market, or so we hear anyway. What are employers talking about when you talk to them about money? Is the tight labor market featuring in when they talk about how much they are going to pay people or is that not much in their calculus of making those decisions?
Mary Ann Sardone: It’s an interesting question, Peter, because you would think it would be front and center in those calculations for how much they budget on an annual basis, but it actually comes with a different set of concerns. When an employer starts thinking about a tight labor market, they're thinking: ‘Am I going to be able to get the people in the door who I need to fill the roles? And am I going to be able to keep the people I have?’ But probably their bigger concern is: ‘Am I going to get the people in the door that I need to fill the roles?’
So when they think about having to match to the labor market, they expect to have to pay more for those new people coming in. But for the people inside the organization, there's probably less of an urgency sometimes is what I find. So, when they start to budget for salary increases on an annual basis, they tend to look at other indicators like what everyone else is doing and how much they’re raising pay.
PC: That’s really interesting, isn’t it? And let's just be clear, employers are humans like everyone else and they have their own biases and make their own mistakes. But this seems like a funny one. We're saying, on the one hand, it’s hard to hire people. We’ve really got to be better at hiring. And we're going to have to pay more to get those people in. But for our current employees, we're not going to do anything for them.
Just a reminder that in the US at least right now, 95% of all hiring is mainly backfilling positions when people leave and a big chunk of that is not retirement – it’s people who are quitting to go someplace else. So they're thinking about hiring, but they're not thinking about retention is sort of what it sounds like. Does that sound right?
MAS: Yeah, employers worry about retention, but almost after it's too late. Once the people are gone, they start to think: Could we have done anything about that loss? Of course, there are other things that create retention issues, and pay is just one of those, but it's rising to the top because it is the thing that employees are most easily finding can be replicated somewhere else.
“Employers should be very transparent about the process and what they can expect. Be able to clearly talk about how pay is determined. Just that level of transparency alone gives employees confidence that someone is watching this.” – Mary Ann Sardone, Mercer
PC: Right, and it’s pretty objective. People can tell you how wonderful their culture is and I think most of the job seekers discount all that stuff. But a 10% in salary increase? They can kind of make sense that.
Let me cut to at least one of the chases here and that's your new US Compensation Planning Survey. The salary increases that were budgeted for this past year were 2.8% and for 2019, apparently the tightest labor market at least by some measures in a very long time, it's only 2.9%. So it's not even at 3% for 2019, despite all the talk about an incredibly tight labor market and we can't fill all our jobs.
Well, let me ask you about 2018: When it was 2.8%, did employers overspend on that or did it look like they really stayed at 2.8%?
MAS: It’s hard to say sometimes. They stick to their budget. We have an update to that which says, yes, they probably spent around 2.8%-2.9%, but what did they spend on new people coming in the door, the new hire they had to backfill someone they lost? That’s not factored into that budget.
PC: Oh, no, it’s not? Okay.
MAS: No, it usually comes out of a different line item. So even though they may be delivering annual salary increases with a budget of 2.8%, that doesn’t mean they brought someone else in that usually costs more.
PC: So let me make the obvious point for job seekers, it sounds like the lesson here is you’ve got to move.
MAS: I think the lesson here is, you’ve got to move and you’ve got to be vocal, right? If you do want to stay and you have a great culture and you love your job, but you just feel like you’re not being valued, you should probably speak up. Because what we’ve found is that the squeaky wheel usually gets the grease. They get the attention. And if you are complacent and you don’t know what you’re worth, you will more than likely be given a typical, average increase.
PC: Right. So let’s talk about how to speak up. How do you speak up to the people who run compensation and tell them you feel underpaid? Since you see these folks all the time, what works for them?
MAS: I think it’s really about sitting down with your manager equipped with the right information – what you’re bringing to the position, how you’ve performed in any given year, and information about the labor market.
You can look up quickly on the internet around what you’re worth. There’s PayScale, Salary.com and other surveys that are more accessible to the employee, and you can actually show them what you’re worth. Unfortunately, sometimes it takes getting another offer and bringing it to the table. But if that’s what it takes and you want to stay where you are, you need to know what you’re worth and you need to make it known to your employer. It’s probably not the compensation department, because they’re behind the scenes. It’s your manager. They’re your advocate.
PC: Yeah, but let me be kind of cynical here on this. I can do that with my hiring manager who may go in and fight for an increase for me, one that they’re going to take away from someone else. But what do you think persuades the compensation people to get bigger budgets? Who’s making the decision?
And before you answer that, let me read something interesting from your report here, and that is the US salary increase budget in 2015 was 2.8%. The budget increase in 2016, the labor market gets tighter, it’s 2.8%. The budget in 2017, the labor market gets tighter still, 2.8%. The budget in 2018, the labor market gets even tighter, 2.8%.
There’s a trend here which even I can pick out and that is that it’s not responding to what’s going on in the labor market. What do you think is going to get the attention of the people who control the budget?
MAS: Well, a couple of things. I’ve been thinking about this survey for a while. We’ve done this for over a decade and when I moved into this role, I started to think about what is going to move the needle on this number?
It doesn’t seem like a tighter labor market or a more robust economy is moving it, and I think it’s because of the way this data is surveyed. We ask organizations to predict what they’re going to spend and then they ask us what everyone else said. We’re looking at this one line item and saying what is everyone else doing, despite the fact that we all might have different talent strategies and workforces that we need to either attract or build. We’re not looking at it as a strategic investment. We’re just looking at what everyone else is doing.
PC: Yeah, isn’t that interesting?
Greg Shea: The question that I had was, in the article, there’s a graph that has employee satisfaction with rewards. So while Peter’s numbers were consistent across time, it looks like almost a cliff function – not quite – between 2015 and 2017 for “I believe I am compensated fairly for what I do” and “The better my performance, the better I will be rewarded.” Two years in particular. Any thoughts about what lies behind that? It was quite consistent for the three years before that.
PC: Let me just give the numbers on that. Employee perception of fair pay declined from 57% to 52% and perception that my pay reflects my performance has dropped from 55% to 47%. What’s going on there?
MAS: Right, so employees see this and they’re vocalizing it in their engagement surveys and some of the other surveys that employers are conducting. I think it’s because employees are recognizing that, during the recession and coming out of the recession, we all needed to tighten our belts, I understood why I wasn’t getting a pay raise. But now, we’re doing well as an organization, the economy is booming. Why am I not sharing in those rewards? And look, they’re seeing the proxies of their leaders and the pay raises they’re getting. They’re not blind to this and there’s more information available for what you can command at another organization.
There’s more information. Their companies are doing well. Performance is going up. And now they’re vocalizing that through dissatisfaction with their own pay.
PC: You quote in here the results from a PayScale survey, and we have the PayScale folks on here regularly, that 70% of employees who ask for a raise, received one. Are you surprised by that Greg? I must say, I’m really surprised.
GS: I was wondering about the gender piece behind that. We have studies that say men are far more likely to ask for a raise, whether they’re deserving or not. Women, even when they are much more qualified, are more reluctant to ask. Are there particular demographic groups that are more likely to be told that if you ask for the raise, we give you the raise, as opposed to not yet?
MAS: I don’t have the data on that and I don’t know the percentage of employees that are actually asking. So 70% of employees who are asking are receiving. Is it 5% of the population who are asking for a raise? I’m not sure, and PayScale could probably dig into that.
PC: After this show, it’s going up! [laughter]
MAS: Absolutely. But one of the first things we talked about is really being able to vocalize your desire for a pay increase. They’re humans, right? Organizations are full of humans and they’re busy people, and they think that if you haven’t said anything, then you’re okay.
PC: Let me ask you both about this. This seems quite troublesome to me. We’ve moved into an environment now, where if you want a pay increase, you have to go in and demand it. And soon everyone knows that, and so if you are the manager, you are continually dealing with these requests. They’re not increasing the budget for you. So, it can’t be that you can continue a situation where most people who go in and ask for a raise are going to get it because they’re not increasing the budget.
So what that’s going to mean is that people who are demanding, are going to maybe get more, but those who aren’t demanding are going to get even less. And do you want to be in an organization like that where it’s just a constant negotiation with your boss and people got to threat and go out and get other offers to get an increase? When do you think employers are going to throw up their hands and say, okay, can’t do this anymore?
MAS: Well I think they’re starting to. Pay transparency and pay equity are forcing their hand. If we have this continual jockeying, where the loudest voice gets the raise, how do you maintain any level of equitable pay in your organization if you’re not systematically increasing pay based on performance or some other factors that are defensible? So at some point, we’re going to tip the scales, where there’s just too much jockeying around of compensation. In fact, we’ve heard from some organizations thinking about more algorithm-driven models around determining pay.
PC: Well, here’s one and maybe you know some others. If you do Mary Ann, chime in. One company has said enough, we promise you that we will be checking your compensation against the market and we’re not going to do it just annually but we’re going to do it constantly, and if it looks like you’re behind, we’re going to raise your pay and keep it up to market level. And we’re not going to engage in negotiations over pay any more. And we’re going to try to – because we’re also interested in teamwork – we’re not going to spend a lot of time trying to differentiate pay based on performance anymore, which seems to be quite a radical departure. Are you hearing of any other companies doing anything like that?
MAS: We’re hearing rumblings of that. A couple of things are within that. One is just being very transparent about the process and what they can expect, and being able to clearly talk about how pay is determined. Give employees the confidence that you have your eye on the market and you have your eye on how they’re paid. Just that level of transparency alone gives employees confidence that someone is watching this.
The other part of it is, then, do we really want to differentiate base salaries based on performance? We’ve had salary increase budgets of 2%-3%. How do you really differentiate among performance levels in a meaningful way with such small budgets? I think that’s what has forced some employers to say you know, enough is enough. Maybe we’ll implement some variable pay or some pay for performance spot bonuses or some other kind of compensation that will really differentiate our high performers.
PC: Yup. That’s part of what’s driven the move away from these ratings-based performance appraisals.
GS: What is the role of pay in affecting loyalty, if any, in organizations?
MAS: I think times have changed on that where pay is probably no longer part of the loyalty contract. It’s more of a contractual obligation. So we think about rewards in kind of a hierarchy when we talk to clients. Your core compensation and benefits are table stakes. That is a contractual obligation to get them in the door. To keep them? You’re going to need to engage them in a career trajectory or a career opportunity. You’re going to need to care about their well-being – physically, emotionally and financially. And you’re going to have to create some overarching purpose for the work that they do, in order to keep them.
I think companies are starting to shift away from those contractual elements to create that loyalty and looking to other elements of the employee value proposition to create that stickiness that perhaps they didn’t have to rely on in the past.
PC: So, compensation is kind of an irritant frankly for these folks. It’s table stakes and we can’t do very much to make you happy with it, but we could certainly irritate you about it and it sounds like we do. Let me give you an example of this. We hear from colleagues and people in executive search, if you left company A and moved to company B, doing the same job these days, you’re probably looking at about a 20% pay increase. And looking at your survey, the average increase for a promotion is budgeted last year at 7.8%. So you can get 20% by walking across the street to another employer and doing the same job, but you’re only going to get 7.8% if you stay and get promoted to the next level. It seems to me that’s sending a pretty strong signal to people about how the labor market is working.
MAS: Right. You raise a really good point. It’s something we dug into in our research. We said, what’s happening with promotional increases? When we did an update in October to the comp planning survey, we dug into the promotional increase budgets and we saw that they ticked up. So there’s a recognition of this fact that we’ve been holding the line on promotional increases for our best performers. The people we promote are the highest performers in our organization and we’ve held them back. Because they can go to another employer and get the same job at 15% or 20% higher, and all we’re delivering to our highest performers is at best a 10% raise when they are promoted.
We saw the promotional increase budgets go from earlier this year at about 1.2% of payroll up to about 1.7% of payroll for those that moved it. That’s an indication that there’s something to this idea of “promoting from within” and really recognizing that more needs to be done for the higher performers.
PC: Okay. Although it looks like the pay increase though only goes from 7.5% up to 7.8%, right?
MAS: Right. I don’t know that we know exactly how much they’re delivering yet, but the budget overall is getting bigger. There’s a recognition of either, we’ve got to promote from within; we’ve got to build our talent. We can’t buy it. There’s just too tight of a competitive labor market, so we’re going to have to build from within and so we better increase our promotional increase budget. And we’ll see how it comes out in our update next year, how much those promotional increases actually increase.
PC: And my bet is that it’s going to take a lot more turnover before companies start to really do something about their internal compensation practices, and I think right now, they are weighted so heavily on hiring as a way to meet their talent needs. They’re not paying much attention to retention and for sure, they’re not spending much attention on advancing people within their own organizations. But Mary Ann, we will check back with you next year on this and find out whether we’re right.
GS: If we get to 2.9%.
PC: Woo hoo, there we go.
MAS: Looking forward to it.
PC: Mary Ann, thanks for being with us.