Pay for Performance in 2023

My intention below is to recap my recent three-part webinar series with what I have seen progressing in the packaging industry from a market compensation perspective. There have been many changes occurring into mid- and late 2023, as well as many planned for 2024 and beyond.

The biggest change is considering the labor market and how fast or slow salaries are moving in the market across different geographical areas, industries, and job levels. A key to understanding your company pay positions is ensuring you have relevant survey data to benchmark positions and assess how much inflation and other economic factors impact the market.

Pay for performance is expected to be a significant approach for pay differentiation in late 2023 and 2024. The big question is, how does the employer ensure they are spending their merit increase dollars the right way?

One effective method of merit dollar allocation is a traditional merit pay chart. Merit pay charts consider an employee’s performance rating and pay within their salary range. The merit pay charts intend to ensure the highest increases are awarded to employees with the best performance who are also paid low in the salary range. As employees reach midrange, assuming they are meeting performance expectations, increases will trend with the budget. For employees high in the salary range or near the top, pay slows down, and increases tend to trend at or below budget as those employees are likely already paid above market.

The table at right is a sample merit chart based on three performance ratings. This is the expected distribution that will drive how much above or below the intended budget increase can be allocated to each cell. In the example table, the budget was anchored at Meets Expectations for employees in the bottom third of their range. Higher performance will allow for a salary increase allocation above the 4% budget. All other positions will result in a salary increase below budget.

Below are some examples of how this chart is implemented:

• Sally Smith is a financial analyst performing at an Exceeds Expectation level. She is currently paid at the minimum of her salary range. As a result, Smith’s manager can allocate a 6.5% increase.
• John Snow is a purchasing manager who has been with the company for 15 years. He is meeting expectations but is paid almost at the top of his salary range. Snow would be eligible for a 3% merit increase.
• Mark Hanson has been an accountant with the company for three years and is paid in the middle of the range. He has performance issues and has been rated Needs Improvement. He is not eligible for an increase during this compensation planning cycle. His compensation could be reviewed again in six months, assuming improved performance, to determine if an off-cycle pay increase is warranted.

The performance rating distribution is typically based on employee ratings from the prior year. As a result, once all salary increases are established utilizing the merit pay chart, some adjustments may need to be made for some ratings if the final allocations exceed the budget. This is typically done at a department level initially and then rolled up to a leadership level for final review to ensure pay equity.

Affordability

Consider the labor market and how fast or slow salaries are moving in the market across different geographical areas, industries, and job levels. Remember, a key to understanding your pay position is ensuring you have relevant survey data to benchmark positions and assess how much inflation and other economic factors impact the market.

So, what are some options for pay if you have a small budget and are not able to increase base pay? Consider the following:

• Instead of a base salary increase, provide a lump sum equivalent to the base salary increase. These increases are considered supplemental wages and are taxed at a higher rate. Since lump sum increases are a one-time payment, they do not increase fixed costs over time.
• Determine if any benefits can be added (e.g., transportation stipend, tuition reimbursement) that would benefit a large percentage of the employee population.
• Consider increasing the employer cost share of benefits as another option.
• Provide increased paid time-off programs (employees rarely abuse them).
• Implement companywide recognition programs that can be given out on a quarterly or semiannual basis. Although these awards tend to be smaller (e.g., $500 or $1,000) they can provide a small and welcome boost for employees and their families.

My efforts here once again have been to stimulate your thought processes regarding ways to improve your hiring, retention, and employee motivation strategies.

This webinar recording is available at NOW.AICCbox.org for All Access Pass holders or for individual purchase. Explore the various webinars AICC includes in its All Access Pass at AICCbox.org/Pass.

Contact AICC Director of Education and Leadership Development Taryn Pyle at tpyle@AICCbox.org or Education and Training Manager Chelsea May at cmay@AICCbox.org with questions.  

Tom Weber is president of WeberSource LLC and is AICC’s folding carton and rigid box technical advisor. Contact Tom directly at asktom@AICCbox.org.