…So this morning I read a great piece (here) from the NY Times highlighting a sea change in the way compensation is being managed in the U.S. Namely; the percent of annual payroll budgets dedicated to salary increases has shrunk from a high of 10% to a current level of 2.9%, and short-term incentives as a percent of payroll has skyrocketed from 3.9% (when Aon first started tracking the metric in 1988) to a record 12.7% last year.

^In short, there is ever increasing downward pressure on base pay, with companies shifting dollars that have historically been allocated towards salary bumps towards one-time bonuses and perks. This transition is good for employers (lowering their long term human capital costs by keeping salary dollars low), but what does this change do to employee engagement levels?

…Examining the answer to this question without assuming a casual relationship here, I would note that (according to a report from Quantam Workplace here) employee engagement levels are at their lowest levels in eight years, and that more than a quarter of employees question if they are paid fairly in relation to the value they bring to their organizations. At the same time, retention is pretty stable (more than three quarters of employees say it would take a lot for them to leave their organizations). So what does it all mean? Would employees rather see more in the form of annual base pay increases or do they prefer short-term incentives and perks? And if they would prefer the former, to what extent is this shift impacting morale?

…I have a theory on how people appreciate/don’t appreciate compensation (that to be fair is based more on my own meandering experience than any quantifiable research), and it goes like this:

I think that the overwhelming majority of employees would prefer a base pay increase to a bonus or perk. This is because most people intuitively (if not explicitly) understand the time value of money, and appreciate the compounding effects of salary increases on their long-time lifetime earnings. But, I also think that most employees don’t greatly appreciate the year-over-year 2%-3% increases that they currently see on their paychecks… and if employers shifted the dollars currently going to bonuses back to base to make those increases, say, 3%-4% instead I don’t know that they’d appreciate them a whole lot more. This is because regularly scheduled pay increases – regardless of the form they take – eventually take the form of entitlements. For this reason, an unexpected spot bonus for performance – particularly if it takes the form of multiple perks spread out over the course of the year – should theoretically do more for engagement and morale than a marginal annual pay increase.

Furthermore, a while back Google also did some great internal research that showed that their employees were happiest when they invested in experiences as opposed to material goods, which makes me think that that well thought out employer incentive/perk (whether it has monetary value or not) could go much further than one might think at face value.

.With all that said, ultimately the compensation function is going through a sea change. I’ve written before about how traditional compensation structures haven’t kept up with the modern employment marketplace (a position supported by HR Thought Leader Kris Dunn here). And much has been made about the fact that the long-term incentive structures used to reward talent at most publically traded companies are valued by neither employees nor the public relative to their social and actual costs to employers.

…Which is really just a long way of saying that compensation functions everywhere have got some work to do where it concerns designing programs that attract, incentivize, reward, and retain their talent.

Happy Tuesday,