A trio of new salary surveys from top consulting firms—Mercer, Hewitt and WorldatWork—predict that U.S. employers will dole out annual pay raises of about 3.8% in 2008, about the same level as this year. The modest raises outpace inflation, which is currently running at 2.7%.
All three surveys show that more employers are turning to bonuses, rather than higher raises, to reinforce performance, a trend that Hewitt researchers called “the biggest turnaround in compensation practices in 10 years.”
Companies responding to the WorldatWork survey report that they are budgeting 12% of their payroll budget for bonuses.
Most bonuses will be part of variable pay programs where employers provide extra cash to workers who hit specific work-related targets. While base pay remains relatively constant, bonuses create motivating incentives for employees. Employers feel they can reward employees without committing to long-term salary increases.
Crafting fair—and legal—bonus systems
As with any compensation program, employers must make sure they offer bonuses on a level playing field. All workers within a specific class of workers should have an equal chance at earning the bonus. You’ll want to be especially alert for disparities that unfairly affect protected groups such as women, minorities, the disabled, or workers over 40.
Here are some tips for keeping your bonus program out of litigation:
- If the bonus program is a new one, start small. Run a pilot program and then analyze the results. This allows you to discover inequities and bugs in the program that can be ironed out before running it on a larger scale.
- Check you pilot program results to see if they unfairly impacted workers in protected groups. Remember, even if you didn’t intentionally design the program to be unfair, workers can bring “disparate impact” claims against you if the program unintentionally discriminates against a protected class of worker.
- Bonuses should be given for objectively measured performance. Avoid terms like “team player” and “fits company culture” when designing bonuses. These can be seen as code words for discrimination.
- Provide reasonable accommodation for disabled workers that allows them to compete for bonuses on a level playing field.
- Even after running the bonus program company-wide, review it to check for fairness and possible litigation on a regular basis. If you have a question, run it past your attorney. Having an attorney’s approval can help protect you.
Final note: Clearly, modest pay increases present retention challenges for employers, but bonus systems offer one way to keep your very best employees.