In an Improving Economy, Revisit 2010 Talent Strategies for Effective Use of Merit Pay

Becky Regan

Lately in the world of employee compensation, it seems that all of the attention has been directed to variable pay plans. This is certainly understandable, given that the majority of employers have had to contain costs for the past two years simply to survive. But many employers are relatively unsophisticated in their employee compensation practices. They need simple, yet effective talent management strategies to implement now in order to retain their employees as the labor market begins to emerge from the recession.


The March 2010 Employment Trends Index (The Conference Board) rose in February for the sixth consecutive month suggesting that job growth is "about to begin," according to Gad Levano, Director of Macroeconomic Research. The index now stands at 93.5, up from January's 93.2, representing a 13.4 percent annual increase which is the highest six-month growth rate since 1994.

According to the Economic Research Institute’s monthly newsletter in February, it reported employer trends showing the first signs of an economic turnaround through increased sales of their salary surveys. They've also experienced a doubling in participation in their surveys, providing further evidence of a renewed interest in current market data.

What happens when the economy's bottomed out and recovery begins? You guessed it: employees who've been sitting tight begin to look around to see what jobs are available. The reality is that most employees haven't received much if any increases in their pay over the past couple of years. Yet the cost-of-living continues to increase. In addition, most employers don't tell their top tier of performers just how valued they are to their organization.

Personal income and state taxes will have to increase due to the financial situation of many states and the Federal government. Coupled with salary freezes, furloughs, or reductions in pay means that there's a lot of pent up frustration amongst workers. They've been patiently waiting for the time to come when they could leave their current job, and it appears that time may be on the horizon now.

The easiest way for them to get a meaningful increase in pay is to leave their current job. The time to act is now to prevent your "best and brightest" employees from going to work for your competitor. If you're an employer whose use of merit pay as your primary means of rewarding and retaining employees, it's time to revisit your merit pay practices for 2010. Here are a few tips you can do now before the labor market fully rebounds:

1) Revisit the dollar amount budgeted for your 2010 merit budget funds. You probably created the amount of dollars dedicated to your 2010 merit pay pool last fall, when the economic outlook was still grim. It may be brighter six months hence, so contact your CFO to revisit budgetary projections for the balance of 2010 and determine whether you can enrich your merit pay pool for this year.

2) Participate now in salary surveys to purchase at significantly discounted rates. As a participant in providing actual pay data to firms who produce salary surveys you are able to purchase them at discounted rates, sometimes up to 50 percent off of the list price. Research salary surveys that are a good match for your industry and jobs within your organization. National associations typically offer low cost industry surveys and are a good, inexpensive resource for market data. Now is the time of year to participate in surveys, which are typically published in late summer/early fall.

3) Assess individual and/or job group pay movement. Review your highest performing employees' pay on an individual basis, comparing them to newly released market rates to ensure competitive pay practices. Do the same review for specific job groups, i.e., IT or Operations, particularly if you're concerned that your pay rates are no longer competitive for those jobs.

Specialized jobs will receive higher pay rates in the new economy; semi-skilled rates will remain deflated. In a recent Workspan article, "Holding On," Fermin Diez from Mercer identified two talent strategies organizations must use in order to retain high performers:

• Organizations must be good at identifying key resources and using them in a way that brings the highest return.
• Organizations must be willing to accept that internal equity may be undermined by focusing on the most deserving individuals.

He provides a couple of examples to demonstrate how these strategies can be implemented. Some companies may choose to pay "key" employees over market rates at the 75th percentile. Others have restricted merit pay increases to only their top tier of performers. Each organization has to fully explore a menu of talent management strategies to select and customize those that work best for their industry and organization.

Now is the time for you to reassess your merit pay plan for the balance of the year and implement talent strategies to retain key talent in anticipation of a rebounding labor market. What talent strategies is your organization in the midst of implementing to ensure that your key employees stay put when other job opportunities appear?