Pay Increases for '99 / Gainsharing / Internal Equity - CompDoctor November 1998

Q: Every year we try to predict what the market is going to do with salaries so that we can budget for raises. We also need to keep our ranges competitive so that we can hire new employees. In this tight labor market, what should I plan for? -C.R.

CompDoctor: Don't tell anyone, C.R., but I've just closed the blinds in my office and am taking out my trusty crystal ball. And in my crystal ball I see thousands of others just like you, trying to predict the unpredictable. (By the way, I am also receiving a message from your Aunt Millie in Dallas. Will you call her already? Sheesh.)

A lot of smart people are spending big money on market forecasts, only to find out a year later that they were wrong. Over the past 10 years, market analysts have consistently over-projected the actual cost of raises and starting salaries. But then, nobody's perfect.

Here's what we know: Double-digit salary increases are gone forever. They've been replaced by flexible benefits and variable pay. And for the past seven years, standard average raises have been hovering between 3 percent and 5 percent per year.

Now, in the Twin Cities, where the unemployment rate is 2.3 percent and only dead people can't find a job, you'd think the average would be higher. But it's not - mainly because the employees who get less-than-average raises offset those who get more, and because variable pay and bonuses are not included in the salary figures.

For 1999, according to a research report from the American Compensation Association, companies nationwide are planning 4 percent raises for lower-level exempt employees and up to 4.5 percent for executives.

Salaries for non-exempt employees are likely to increase by 4 percent to 4.3 percent. Underwhelmed? Well, your employees will be too. Think about it: At a salary of $30,000, a 4.5 percent raise over 24 pay periods amounts to a gross increase of just over $28 per week. Take away taxes and any increase in the employee's share of health insurance premiums, and the poor sot has barely enough pocket change left to buy a beer to drown his sorrows.

In other words, if you think you're rewarding people with raises determined by the market, you are crazier than a guy with his blinds down, staring into a crystal ball. You really need to consider supplementing those raises with pay related to performance.

It would be equally dangerous to rely strictly on market surveys to determine salaries for new hires. Those ranges never move up quite as fast as existing salaries, and for 1999 it looks as if salary ranges will start 2.6 percent to 2.8 percent higher than for 1998. Again, you are not in the business of propelling your superstars toward the open arms of higher-paying competitors, so keep monitoring the market. And remember that the figures quoted here are only averages; I can safely predict that you will need to offer substantially more to recruit and retain the best candidates.

Now, about your Aunt Millie in Dallas

Q: We are planning on establishing a gainsharing plan in our factory this year, but someone told me that a federal law prohibits gainsharing programs for hourly employees. What can we do? -K.O.

CompDoctor: First of all, you can K.O. that nasty rumor, K.O. It ain't so. Gainsharing plans - giving workers a share in the dollars earned or saved due to productivity gains that those workers generate - are not, never have been, and, we hope, never will be outlawed. In fact, a client of ours just reported its second annual gain exceeding $50,000 from a group of 17 hourly employees, each of whom pocketed an extra $3,000 a year.

My guess is that your ill-informed adviser was referring to the Fair Labor Standards Act (FLSA), which dates back to the 1930s. The law does throw employers against the ropes when a gainsharing plan is at stake, but with a few creative moves, even the 800-pound government gorilla can be sent sprawling onto the mat.

Let me explain. The FLSA essentially says that if you have a plan that pays workers for productivity gains, then you must recalculate the workers' hourly wage based on the payment that they would receive as a result of the gains. Thus, if they normally make $10 per hour and they produce gains that would give them an added 50 cents per hour, then you must calculate any overtime pay based on a new hourly rate of $10.50. And when overtime costs more than you had planned, you end up jabbing away at any benefit the company might have realized from the productivity gains.

To discourage you from throwing in the towel, here's a one-two punch from my fed-fighting manual called "Tactics Your Wage-and-Hour Auditor Never Taught You."

First determine the gain or the savings generated by participating employees. Then divvy up that amount into bonuses expressed as a percentage of each employee's pay. Bam! The gorilla goes down for the count.

Most companies use each employee's wage cost as a percentage of the total gain (or savings) to determine individual bonus amounts. Technically no longer a gainsharing plan, the program still looks that way to employees while allowing you to work around the FLSA in a legal manner. Don't break the law and you won't be tossed out of the fight. (Ain't that right, Mr. Tyson?)

The reason this strategy works is that you have effectively delivered a discretionary bonus, or "true percentage" bonus, rather than a shared gain. The law defines a bonus as discretionary if it is not anticipated or not related to productivity or hours worked. The term "true percentage" implies that the bonus is not considered a part of the employee's regular pay.

There are a few other ways to exclude your gainsharing plan from hourly wages, but implementing them is like stepping into the ring with that 800-pound gorilla with lead weights strapped to your feet. Finally, make sure you've got a heavyweight employment attorney in your corner before you put your gainsharing plan into place.

Salary equity goes under the knife

Q: We are having difficulty hiring technical positions in our company because everyone else is paying much more than we are. But if we pay what others are paying in the market, it will destroy the internal equity of our compensation plan. Any suggestions? -R.H.

CompDoctor: R.H., as your compensation health professional, it is my duty to tell you that you have a classic case of myopia, commonly known as nearsightedness, or can't-see-the-forest-for-the-trees disease. In fact, your question gives new meaning to the term "Rh factor," used in medical science when a pregnant woman's blood fights with her baby's, and in the end, nobody wins.

The good news is, your problem is curable. But I'd be dishonest if I told you that it won't hurt a bit.

Now, stick out your tongue and say, "Equity, shmequity." The fact of the matter is that internal equity and market competitiveness don't always line up the way you want them to. In business, competitiveness comes first because it is necessary for survival. Internal equity is good to have, but it is secondary, like an extra kidney. If you bite the bullet and pay what the market is paying, you are more likely to attract and retain the technicians who will keep your company on the cutting edge - and that provides the resources you need to boost salaries for everyone else.

Several of our clients have handled this operation by removing the technical positions from the regular salary schedule (forceps, please!) and placing them on a new schedule that is consistent with the market. True, your delicate internal equity may experience some bleeding, but that is a temporary side effect and will clear up over time.

Other techniques recommended for attracting and keeping good technical people include sign-on bonuses, more-frequent raises, and maximum dosages of training. However, I must make you aware of the long-term prognosis: No matter how much iron you add to the compensation package, you may still get an anemic reaction from job candidates if you don't treat your employees with care.

A recent survey reported in an Institute of Management & Administration newsletter shows that pay is ranked 11th on the scale of things that motivate and help to retain employees. Higher up on the list are benefits such as respect, challenging work, and opportunities to have a tangible impact on the company - vital nutrients that can be destroyed by a company's dependence on pay equity.

Need a second opinion? Just ask any of Fortune's "100 Best Companies to Work for in America" (Jan. 12). They didn't make those lists by compensation strategies alone. They also maintained environments in which people like to work. So before you reach for the checkbook and raise your technicians' salaries, grab your stethoscope and listen to the heartbeat of your company. If it doesn't sound lively in there, find out why and begin treatment immediately. Otherwise you may be stuck in the intensive care unit for an uncomfortably long time.

Back to top

< Back