August 24, 2019

US Employers Shifting Toward Variable Compensation and Customized Benefits to Hold Annual Salary Increases Below 3 Percent

US Employers Shifting Toward Variable Compensation and Customized Benefits to Hold Annual Salary Increases Below 3 Percent

Gallagher’s 2019/2020 Salary Planning Survey Reveals Organizations Are Using Spot Bonuses, Performance-Based Compensation and Incentive Programs to Limit Structural Salary Increases, With Many Citing Higher Health Insurance Costs as a Primary Factor

While economists and policymakers often argue that sustained low unemployment incentivizes employers to raise salaries, many organizations are experimenting with new ways to prevent base salary costs from rising by more than 3 percent annually according to Gallagher‘s 2019/2020 Salary Planning Survey Report. Employers of all sizes and across all industries are using variable compensation models and customized benefit options to attract and retain workers for whom the highest possible pay may not necessarily be the top factor in deciding where to work.

The 2019/2020 Salary Planning Survey Report found nearly four out of 10 (39 percent) organizations now use variable pay for at least one employee group. While the tight labor market is directly responsible for the rise in employee referral, hiring and retention bonuses, 20 percent of employers reported using lump sum awards for at least one employee group. And approximately one-third (32-35 percent) rely on variable pay for executive and manager-level employees, while nearly a quarter (22-25 percent) of employers also offer variable pay to lower-level employees, including those already qualifying for overtime pay under the Fair Labor Standards Act. The portion of compensation subject to performance rises from 5 percent for low-level workers to 25 percent for executives.

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Additionally, more than one out of four (26 percent) employers indicated higher healthcare costs were a primary factor for keeping salary increases in check. This aligns with Gallagher’s 2019 Benefits Strategy & Benchmarking Survey, where nearly half (47 percent) of employers noted that controlling employee benefit costs was a top human resource priority. That said, employers that implement healthcare cost-sharing tactics, such as increasing employee premium contributions, must be conscious of the fact that employees and their families — just like their employers — suffer the financial pressure of higher healthcare expenses. As a result, lower salary increases coupled with higher healthcare expenses can have a negative impact on employee retention.

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“Through our in-depth analysis of the data, as well as countless conversations with employers, decision makers appear reluctant to raise salaries across the board because this significantly increases operating costs both in the near and long-term,” said William F. Ziebell, CEO of Gallagher Employee Benefits Consulting and Brokerage. “It’s important to understand that pay increases are not the only solution for attracting and retaining employees – particularly Millennials. By leveraging tailor-made benefits and compensation strategies, organizations can create a deeper connection with their workforce and, at the same time, keep expenses in check. A few examples include flex-time or remote-working options, as well as health and wellness programs.”

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