Is now the time for employers to close the gap with base pay market competitiveness?

Posted by Gregory Stoskopf on February 23, 2018.

With the reduction of corporate tax rates in the Tax Cuts and Jobs Acts of 20171, an important question is raised: Is now the time for firms to close any gaps between (1) their stated compensation philosophy and target market percentile competitiveness and (2) reality, which is often less?

Hundreds of competitive market analysis studies over the years have shown that it is common for certain functions, or entire organizations, to find actual market compensation competitiveness levels fall short of stated target percentiles2. The desire to close that gap is usually in conflict with tight salary budgets and limited funds beyond regular merit budgets.

Indeed, a rare after-tax income boost potential is being met with some executives asking, “If not now, when?” Analysts see the use of the tax reduction as an indicator of firms’ priorities and strategy, underscoring even further the importance of real and perceived impact that will be compared and contrasted across peer firms in each industry. This opportunity may be very timely, as recent data3 indicate a tightening labor market and wages that are finally on the rise in a meaningful way, after several years of inflation-adjusted stagnation.

Implementation of this solution could take many forms. It could be applied in the form of an increase in the merit budget for the entire organization, or for creation or enhancement of a market adjustment budget, applied to select employees or jobs. It could also be used to target specific critical workforce segments (such as engineers, IT professionals, or nurses) that often demand a higher level of market competitiveness than the general employee population.

In recent years, compensation trends have focused on increasing annual incentives or bonuses because they don’t add to the organization’s fixed costs and can adjust to annual firm financial performance. A potential downside of this is perceived neglect around base salary adjustments, making the current opportunity a chance to address this perception, especially given the fact that the corporate tax cuts are permanent, unlike the individual tax cuts, which are set to expire in 2025.

The preferences of today’s workforce go beyond traditional rewards. Workers are looking for a relationship with an organization that offers a personalized, flexible and customized experience, set on a firm foundation of compensation and benefits, differentiated by other programs, including recognition, career development, and a holistic approach to wellbeing.

With the rapidly evolving nature of the future of work, the importance for employers to differentiate themselves as an irresistible place to work, and the stewardship necessary to manage the balance sheet, companies now need to pivot to a more strategic view of rewards.

Smart, forward-thinking corporations wanting to remain competitive in the talent marketplace today will give this opportunity careful consideration.

Gregory Stoskopf is the leader of Deloitte Consulting LLP’s National Compensation Strategies Practice and serves on Deloitte’s Global Rewards Executive Committee. He is a frequent speaker and author on compensation and talent topics within the HR profession.



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