Controlling Compensation Costs: Reducing the Size of Merit Pay Increases
Controlling compensation costs ranks fifth on controllers’ list of where they are focusing their efforts. In this area, it is often best to take a cue from compensation managers who face this issue every day. Nearly half of these experienced professionals indicated that reducing merit pay increases was their top method for controlling compensation costs. In many cases, however, companies are combining reduction in merit increases with a new emphasis on performance and rewards to top employees, partially as a way to offset any resulting ill will, as well as to emphasize the “merit” portion of the merit increase concept.
Following well behind reduced merit increases are hiring freezes and head-count reductions. More than one-third of compensation professionals indicated that these were their most effective means of controlling costs. Far more creative and less draconian is to create a pay structure that distinguishes much more sharply between high and low performers. This approach ranks third in effective-ness, but has a much better impact on morale and productivity.
