With greater confidence in the direction of the economy, companies are slowly increasing salaries for U.S. workers and their approach to incentive compensation is crucial to maintain growth. Real hourly wages in August rose 0.4 percent for all workers in the U.S. compared to July, according to the most recent report by the U.S. Bureau of Labor Statistics. While wages may be slowly rising for workers overall, they are expanding quickly for other staff depending on their performance. The concept of performance-based pay is increasingly being incorporated in compensation strategies, which aim to reward and recognize employees who bring in the most revenue for the company. Not only are employers increasing salaries but also providing workers greater opportunities to earn bonuses and other incentive compensation. Next year, pay increases in the U.S. are expected to raise salaries by an average of 3 percent, which is a slight increase from the 2.9 percent for 2014, USA Today reported. Laury Sejen, managing director of rewards at consulting firm Towers Watson, said compensation increases for average workers are barely above the rate of inflation, which sits at nearly 2.1 percent, according to USA Today. Although pay increases will be 3 percent for average workers in 2015, top performers will expect to see greater levels of compensation in comparison. In 2014, high-performing employees received an average pay raise of 4.5 percent, which is 1.6 percent higher than for the average worker this year. Effects of compensation on retention The main driver for this difference in compensation could be related to the need for employers to keep their best workers. Sejen said base pay is the top reason for job candidates choosing a company. However, it could also be the deciding factor in whether workers decide to join up with a competitor, which makes this component of compensation a focus for many businesses. Providing workers with competitive pay will help assure employers their most talented workers will not jump ship. While providing workers with a higher salary is enough to get many in the door and keep them at the company, firms need to step up their incentive compensation management. “But simply offering a competitive salary and annual bonus is not enough to win the war for talent,” Sejen said in a statement. “Employees believe that employers are falling short in how pay decisions are made and that there is much room for improvement.” Firms could install software solutions to help them measure employee performance and make sure they are paid exactly as they should. Bonuses to account for more of payroll As a part of incentive compensation programs, companies are more open to providing workers bonuses for meeting performance targets. A separate survey from human resources and consulting firm Aon Hewitt also found that not only are companies increasing base pay but also investing more in giving workers bonuses. The survey showed 91 percent of companies in 2014 had a variable pay program, which may include bonuses, up from 78 percent in 2005. With variable pay accounting for more of their payroll, companies should consider implementing solutions for managing their incentive compensation programs. Next year, firms will spend 12.7 percent of their payroll on bonuses and other incentive compensation for employees. “In a more robust job market, competition for talent exists in every sector,” Ken Abosch, compensation, strategy and market development leader at Aon Hewitt said in a statement. “As a result, we are seeing industries that have traditionally shied away from providing bonuses, such as agriculture, higher-education and the federal government, realizing they must establish variable pay programs to compete for and retain the best talent.”
