Compensation Rates in Today's Economy

April 13, 2010

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With unemployment high and profitability low, many businesses have shifted focus away from compensation. Yet as the economic recovery gains momentum, employee compensation is becoming an increasingly important factor in business success.

The economic downturn has had a significant effect on compensation rates, with many companies adopting wide-ranging pay freezes and a significant portion of the workforce becoming more concerned with job security than salaries or benefits. Although keeping costs low remains a priority among employers, compensation is likely to be an increasing concern as the economy stabilizes and businesses refocus on retaining their best talent.

According to a March report from the United States Department of Labor, employers in private industry spent an average of $27.42 per hour worked in total employee compensation at the end of 2009. Worker wages and salaries averaged $19.41 per hour worked, accounting for 70.8 percent of compensation costs. Benefits constituted the remaining 29.2 percent.

In the manufacturing sector, compensation costs averaged $31.92 per hour worked, with salaries and wages averaging $21.22, or 66.5 percent of the total. Benefits cost an average of $10.70 per hour and accounted for 33.5 percent of total compensation. Health insurance was the largest benefits expense, responsible for 9.5 percent of manufacturing compensation in the last month of 2009.

In terms of wages, compensation has changed little in recent months. A separate report from the Labor Department, released in March, found that real average hourly earnings for all employees rose by 0.1 percent from January to February. However, real average weekly earnings decreased 0.2 percent over the same period due to a 0.3 percent decline in the average workweek.

Although financial conditions may be challenging for some businesses and there is relatively little mobility between jobs at the moment, it's becoming increasingly important for companies to pay attention to their compensation budgets and work on strengthening their compensation packages to gain ground as the economy stabilizes.

"What you want to do is make sure that you are positioning yourself for the future," Stacey Carroll, director of customer service and education at compensation research firm PayScale, says at the company's Compensation Today blog. "Your best performers who are paid less than the market will jump ship to find a better paid job and they are going to do so quicker than those that are earning equal or greater than the market in these times."

Incentives are necessary for retaining top talent and remaining competitive in a rapidly changing business climate, but setting and managing compensation rates can be a complex process, particularly when the imperative for cutting costs strains budget adjustments. This problem is more pronounced among small businesses and start-ups, which tend to employ smaller staffs and operate on tighter margins.

"If I were running a start-up and could afford six figures in my salary budget, I'd give myself $35K per year and spend the remaining money on two or three high-quality engineers, marketing people and so on," executive consultant Stever Robbins says at Entrepreneur.com. "As the founder who stands to get rich if the company succeeds, my short-term cash needs should defer to the health of the company."

Establishing appropriate compensation levels and knowing how to adjust them to maintain competitiveness requires careful planning. Inc.com offers the following tips for setting up sensible employee and management compensation rates:

  • Ignore salary averages. While national averages may give a clearer picture of the general economy, setting practical salary rates depends on local compensation levels, regional expectations and variations according to industry.
  • Research organizations. Human resources associations and industry organizations can be useful sources for specific salary data and can often provide comparative details.
  • Talk to peers. Speaking to another business in a similar line of work, but that is not necessarily a competitor, can be a good way to gauge what other companies in the same area are paying their employees.
  • Track competitors. Finding out what your competitors pay their staff can be difficult, but is a fairly common tactic in business intelligence and compensation planning.
  • Determine a range. Instead of settling on a specific number, determine salary ranges for each position in order to have flexibility in looking at candidates or adjusting compensation when necessary.
  • Ask candidates. It's always helpful to ask prospective employees about their own salary expectations and weigh them against the company's preferred range. Remember that compensation isn't just salary, but also benefits, perks, training and opportunities for advancement.
  • Revisit your compensation levels. Compensation fluctuates according to the larger business landscape, making it important to regularly examine your salary and benefits packages to determine if they're still competitive.

Apart from prospective workers, it is also vital to keep track of how a business is rewarding its current employees and to make adjustments when necessary. Even in challenging economic circumstances, a company must strive to hold on to its best members.

"Be aware of who is below expectations, at expectations, and who is excelling, given whatever other factors are involved, such as seniority or other issues," Carroll advises. "You want to be able to make a sensible, justifiable case for why individuals are being paid what they are."

Earlier

How Our Compensation Changes in an Uncertain Economy

Resources

Employer Costs for Employee Compensation — December 2009 U.S. Department of Labor, March 10, 2010

Real Earnings — February 2010 U.S. Department of Labor, March 18, 2010

Compensation Budget Questions Compensation Today (PayScale), March 13, 2010

How to Set Starting Salaries by Stever Robbins Entrepreneur.com

Sensible Compensation by Michael Alter Inc.com, July 3, 2008

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