1984 raises: merit will matter much more
Salaries and benefits for Americans are taking on a new look. Across-the-board salary increases are out; ''pay for performance'' is in. Comprehensive benefit plans are out; ''flexible'' benefits are in.
The changes sound like fads on the latest trend list, but ''these are not flashes in the pan,'' says Philip Alden, a vice-president at Towers, Perrin, Forster & Crosby, a management consulting firm. ''There is a very fundamental, evolutionary change going on. . . .''
As recently as 1980, for instance, salaries for middle managers had gone up almost 10 percent from the year before. This year, they are up by about 6.6 percent and even with a recovery, they will rise about the same next year, according to the Wyatt Company, a consulting firm that specializes in compensation and benefits.
The salary slowdown is partly due to the fact that inflation isn't romping along the way it was in 1980. Managers are getting fewer extra dollars, but low inflation reduces the erosion of its purchasing power.
Another reason for the drop, compensation consultants say, is that the recession, along with tougher competition, has taught companies to get more out of their wage and salary dollars. One way to do this is encouraging better individual performance with incentive pay.
''Competition is increasing. . . . The only way US industry can remain competitive is to produce the best quality at the most efficient rates,'' says Edward Redling, national practice coordinator at Wyatt. ''You simply can't pay all the the employees the same. You have to differentiate between the outstanding and those just doing the job.''
''We have a new ethic . . . of returning to premium performance,'' Marsh Bates told a group of personnel executives in Boston recently. Mr. Bates is a partner in the Philadelphia-based Hay Group, another wage-and-benefits consulting firm.
Since 1979, the gap between salary increases for ''distinguished employees'' and ''competent'' employees has narrowed in the industrial sector, Bates says. In other words, the distinguished workers have been getting less recognition - until this year, when that gap widened substantially. He adds that this is catching on in the financial sector, too, which is concerned about survival in a business changing with lightning speed.
The performance evolution is backed up by statistics. In a survey taken this summer by Willam M. Mercer Inc., yet another compensation consulting firm, executives of major companies listed performance as the most important ''corporate value.'' Of the 305 firms, 77 percent said ''pay for performance'' will become a more important way of reinforcing company values (such as productivity, fairness, and competitiveness), and 66 percent said they plan to decrease accross-the-board salary increases.
On the benefits side, says Towers, Perrin's Mr. Alden, you've still got all the same ingredients, they're just ''packaged and delivered differently.''
The biggest changes have come in health-care benefits, simply because ''medical costs are going out of sight,'' Alden explains. Companies are lowering their health-care costs by upping employee deductibles and contributions.
It isn't so bad for employees, though, he says. An increasing number of companies are reducing employees' salaries by the contribution amount. It gives employees a tax break.
For example, suppose an employee is in the 20 percent tax bracket and makes $ 1,000 a month. His medical contributions are $80 a month. Under the normal system, the employee would receive $1,000, pay $200 in taxes, and $80 in benefits, ending up with $720. Under this newer system, he would get only $920 in pay, because his salary has been reduced by $80 for the contributions. He would pay $184 in taxes (20 percent of $920) and have $736 left over. He gets an extra $16 tax free.
Alden says the tax factor is the new twist in flexible benefits. Employees under flexible plans have a fixed number of ''units'' worth a certain amount. They can spend these units on whatever benefits they want - day care, dental care, etc. But now their contributions to these benefits are also taking the form of reduced salaries.
According to the informal survey of 46 companies which the Hay Group took at its conference here, over half of the companies there were considering increased employee choice in benefits. Hay got similar results at a New York conference.
If it's done right, the choice aspect can mean a cost saving for employers, says Alden. Working with a fixed number of units, employees will be more cost conscious, he said, resulting in company savings. But cost isn't the only incentive.
''Demographics of the American working population is very diverse today - more single people, more women, and working couples.'' Flexible benefits are one way to satisfy all of their needs.