The top priority for C-Level executives is to drive growth and hit revenue targets. But you can’t succeed at business goals without engaged and productive employees.
The 2022 Annual CEO Benchmarking Report by The Predictive Index (PI), which surveys over 200 executives, revealed that the top priorities for CEOs include:
- The economy
- Hiring the right people
- Employee performance and productivity
This CEO’s guide to compensation will provide you with the industry trends you need to manage your workforce and keep talent productive and engaged.
Competition in the labor market
Despite what is going on with the stock market, the talent market is still fierce — at least for now. Demand for workers has remained strong throughout 2022. Even with layoffs on the rise and job openings edging down in Q4, the unemployment rate remains healthy at 3.7 percent as of November, 2022. Employers also continue to report being unable to find the skills they need among available talent to fill the job openings they have which means that the labor market may pick up again in the new year, despite the alarm that a recession might be coming.
In Payscale’s 2022 Compensation Best Practices Survey, we asked thousands of employers whether they were experiencing labor challenges greater than in previous years and 76 percent said yes. Although that percentage looks to dip in 2023 (you can take the 2023 CBPR survey here), a strong majority continue to struggle with attracting and retaining the people they need to thrive.
In other words, we are still in an unprecedentedly heated war for talent. There are still far more job openings than available people with the right skills to fill them, which is what has created the employee’s market that has been dubbed “The Great Resignation” or “The Great Reshuffle.” Even if job openings decrease and unemployment rises, it may not be enough to turn the tide. In addition, expectations for the employment experience have risen since the COVID-19 pandemic.
In a nutshell, workers are pickier than they used to be. They are leaving organizations where they don’t feel valued for opportunities that offer higher compensation, better benefits, more upward growth potential, increased workplace flexibility (including remote work), access to childcare, and a more positive culture with properly trained managers and support for work/life balance.
Although companies in certain sectors are laying off workers and increasing efficiencies, organizations still need people, and there still aren’t enough skilled workers to go around.
The takeaway? People should be front and center for both long- and short-term business strategy. When a recession looms, many organizations default to the essentials needed to take care of customers, but you can’t do that without taking care of the people who take care of your customers. That means listening to what employees want, evaluating and communicating what is tenable for your business, and establishing a reputation for being a great place to work. Otherwise, in a competitive labor market like this, you will continue to lose your best talent. And gambling the good-will of your workforce on a recession is no recipe for success.
The importance of mature compensation management in attracting and retaining talent
Getting pay right is going to be crucial in 2023. If “hiring the right people” and “employee productivity and performance” are among your top concerns going into next year, then you need to be confident that you are paying competitively as well as rewarding employees for their effort and output.
“Hiring the right people” starts with getting the job description right, as well as offering salaries and benefits that are competitive for the position. To this end, more organizations than ever are investing in compensation strategy. Indeed, in our Compensation Best Practices Report (CBPR), Payscale saw a 10 percent increase in organizations that say they either have a compensation strategy or are working on one.
A compensation strategy needs to be based on competitive market data, which you can get from Payscale. You shouldn’t just guess at pay ranges. You need to offer competitive salaries according to a formal pay structure, which compensation management software can help you determine and monitor for fair and equitable pay.
You also don’t want to pay more for new hires without increasing pay for tenured workers. Doing so could result in pay compression and current employees leaving because you aren’t maintaining internal pay equity. This is another area where organizations are investing more than in previous years.
The concept of pay equity means ensuring equal pay for all employees in the same job or with similar job responsibilities by measuring pay gaps across the organization. Although pay equity used to be done to avoid the risk of lawsuits, it is becoming standard practice to monitor it continuously. According to CBPR, pay equity is also aligned with stronger business performance.
The ROI of compensation best practices and fair pay increases
Getting pay right has a demonstrable impact on your bottom line. According to a recent survey from Paycor, labor costs — which include employee wages, benefits, payroll, and employment taxes — can account for as much as 70 percent of total business costs.
It’s important to understand whether you are investing appropriately in employee pay. With pay analysis, you can calculate the average cost of wages and salaries as well as benefits per hour for your employees. You can also compare your organization’s average with data from the Bureau of Labor Statistics, which include a breakdown by employer type, industry, and compensation component.
With so much invested in talent, it is important to adopt compensation management best practices to ensure you don’t underpay or overpay employees. In addition to using market data to determine the right salary to offer new talent, you also need to think about how to maintain fair pay for your whole workforce. This includes pay increases to incentivize employees to remain with your organization as well as rewards for performance — possibly through variable pay.
Pay increases were higher than average in 2022 (over 4 percent) and are looking to be higher again in 2023 (possibly as high as 5 percent) to account for inflation. This is likely to be true even if the economy takes a downturn.
Keep in mind that 3-5 percent is only the average. You still need to conduct pay analysis on specific jobs to see how wages have grown in order to make appropriate market adjustments. In Payscale’s 2022 End of Year Hot Jobs Report, we found that the top 20 in-demand jobs are seeing wage growth between 14 and 30 percent. These include both office jobs like media director and sales consultant as well as blue collar jobs like dock worker and truck driver.
Remember that paying people less than they are worth on the open market, even if there is a recession, does not engage talent or engender loyalty. It is a recipe for turnover and disengagement. As soon as good workers can secure a higher-paying job with more opportunity for growth elsewhere, they will leave, and they may also feel justified in slacking off until then.
Although some turnover can be healthy, excessive loss of talent can be devastating to company growth. It can cost as much as 33 percent of an employee’s salary to replace a person, and that doesn’t include all the knowledge that is lost when an employee leaves unexpectedly. Sometimes, that knowledge can never be recovered, or only relearned at considerable expense over years.
Organizations can mitigate the expenses associated with turnover by rewarding employees for their performance and loyalty as well as making market adjustments and proactively managing pay compression and pay equity for all employees. In other words, paying people what they are worth may seem like a cost, but it saves money in the long run.
Compensation best practices and compensation planning for pay increases may seem like a lot — and it is. To manage compensation professionally, organizations need a dedicated compensation professional or team and must make a commitment to maturing their compensation management practices. Organizations with dedicated compensation resources perform better (i.e., exceed revenue targets) than organizations without. Although the size of the compensation team will vary depending on the number of employees and job families to manage, just having a dedicated compensation function can make a big difference.
Building a reputation of fair pay with pay transparency
The holy grail of modern and mature compensation management is pay transparency. In the ideal scenario, your organization has a compelling compensation strategy and structure to reward top performers and has already ensured fair and equitable pay for all workers before making pay ranges public.
Job candidates love to see pay ranges in job ads. In fact, when this information is not readily available, many job seekers will just look elsewhere to avoid the hassle of applying for a job that may not meet their salary goals. Indeed, 85 percent of workers say they’re more likely to apply for a job that lists a salary. This is especially true among younger-generation workers, who will soon make up the bulk of the workforce.
Of course, the downside of pay transparency is that if you are not also maintaining pay equity, you may discourage current workers who make below the posted range. A study by ResumeBuilder found that 1 in 20 workers will quit if they discover another employee is making more than them for the same position.
You might think that the answer is to not advertise pay ranges because it’s too risky. After all, you might lose current workers if you are not currently investing in pay equity. You might also fear your competition will start stealing your salary ranges. If you are hesitant to adopt pay transparency, you are not alone. According to Payscale’s 2022 Compensation Best Practices Report, 24 percent of organizations never reveal their pay ranges to employees and only 22 percent do so in the job advertisement.
Unfortunately, this isn’t a good option going forward. Pay transparency is on the rise and it is starting to become the law. At the time of this writing, 11 states have either passed pay transparency legislation or are considering it. Pay transparency legislation requires organizations to publish pay ranges in job ads for work that can be performed in these locations.
To avoid pay transparency, some organizations are broadening pay ranges, picking and choosing which jobs to advertise, or including only pay minimums where legally acceptable. However, these are short-term solutions that will reflect negatively on the organizations over time. As pay transparency picks up speed, those that avoid it will start to look suspicious and out-of-touch to job candidates. This will impact the organization’s employer brand and lead to fewer applications and poorer-quality candidates.
Conversely, those that adopt pay transparency will become more attractive to job seekers — and if all employees in the organization fall within those ranges, they will start to be recognized as an organization that pays fairly. This contributes heftily to building a strong employer brand with a reputation for valuing employees. At the end of the day, that is how you “hire the right people” and increase “employee productivity and performance” … even in an economic downturn.
Conclusion
In summary, C-suite executives have a lot of concerns heading into 2023 given economic uncertainty and an employee-driven talent market. However, creating a strong employer brand and an attractive place to work should be at the top of the priority list — and that means investing in compensation management. This doesn’t mean paying all of your employees above market to retain them, but it does mean paying employees fairly and communicating about your pay practices.
Even if we do go into a recession, ensuring fair and equitable pay for employees is non-negotiable. Competitive compensation and benefits packages will be crucial to hiring the right talent. Managing pay increases, making market adjustments, and allotting bonuses for high performers will be instrumental in retaining and engaging top talent. Simply put, you must reward the behavior you want to see. If you don’t, your employees will take their talents elsewhere.
Our recommendation is to invest in resources to create a compelling compensation strategy, manage ongoing pay equity analysis, and get on board with pay transparency. This requires expertise as well as data. That may mean adding a dedicated compensation function to your human resources team, expanding the compensation team you have, and investing in a subscription to compensation management software.
To learn more about salary data and compensation software, solutions, and services from Payscale, request a demo.
Interested in informing our 2023 Compensation Best Practices Report? The survey is open until December 31, 2022. The report comes out in Q1 of 2023.
