In an ever-changing business environment, one bastion of employee compensation could be on its way out: Employers are starting to scrap the annual pay raise.
“Long a standard mode of compensation adjustments nearly as dependable as the tides, the annual pay increase is slowly and quietly disappearing in favor of more dynamic — and potentially more lucrative — models for pay raises,” writes Denver Nicks for Time.
Bonus systems and other dynamic ways of considering employee pay are becoming popular. GE announced this summer it’s ending annual raises, and other employers are following suit. The switch makes employers more agile when it comes to retaining the best employees. “Companies are beginning to introduce more dynamic and motivational systems through which employees can substantially increase their pay without resorting to the traditional avenues: i.e., getting a promotion or jumping to another company,” Nicks writes. And, bonus systems can better track performance, which means employee compensation can better be tied to how a company or division is doing.
The idea isn’t widespread yet, writes Jeff Green for Bloomberg. “Only 1.2 percent of U.S. companies use a discretionary timescale for increasing base pay, according to this year’s compensation survey by Mercer LLC,” Green writes. “About 90 percent of companies have a fixed date when everyone receives their raise, assuming one is granted, while about 5 percent make the change for each employee on the anniversary of their hiring or move to their current job.”
However, not having a known, fixed date for compensation adjustments carries some risk. “It could prove to be a demoralizing switch that leaves many workers’ wages lagging behind the cost of living,” writes Dana Wilkie for the Society for Human Resource Management. Plus, employees could feel threatened, Nicks writes. “The more bonuses account for compensation, the easier it is to take compensation away, whether in order to save cash during lean times or punish an employee for subpar performance,” he writes.
If your company decides to try it, make sure to clearly explain to employees about what they should expect instead, Wilkie writes. Managers and leaders should have a clear plan to make sure raises are awarded fairly and with transparency. “If you keep everything behind the curtains, your employees might assume the higher-ups at your organization are still receiving their annual raise, which could kill morale,” she writes.
Find practical ways to keep employees in the loop, and make sure you’re communicating the value of non-monetary perks. Try sharing total rewards statements: “Those that show workers the financial worth of their wages,” Wilkie writes, “as well as their benefits. These are more important than ever to show the value a company is providing an employee.”