Firms Use More Frequent Performance Reviews, Pay Hikes To Retain Staff

Exponential growth in demand for skilled workers and the Great Resignation are causing many firms to revise the annual performance review and raise for more frequent assessments. 

The goal is to give people they want to retain in a competitive environment more positive incentive to remain. JL 

Lauren Webber and Chip Cutter report in the Wall Street Journal:

The demand for U.S. workers has led some manufacturers, technology firms and other employers to ditch the annual raise and switch to more frequent pay reviews as they compete for talent and keep pace with rising wages. “When the market is evolving in real-time and there really isn’t a leading indicator other than what you’re seeing to compete and hire, you quickly have to adjust.” Compression reviews ensure existing employees, who may have been hired in a less-competitive job market, are rewarded appropriately

The demand for U.S. workers has led some manufacturers, technology firms and other employers to ditch the annual raise and switch to more frequent pay reviews as they compete for talent and keep pace with rising wages.

CoorsTek Inc., a maker of industrial ceramics, last year started doing quarterly pay reviews, primarily to ensure it could hire and retain workers for critical and hard-to-fill manufacturing roles such as production operators and maintenance mechanics. The Golden, Colo.-based company hired around 1,300 people in the U.S. last year, and bringing on new people often meant paying above its usual ranges.

 

“When the market is evolving in real-time and there really isn’t a leading indicator other than what you’re seeing to compete and hire, you quickly have to adjust,” said Irma Lockridge, the chief people officer at the 6,000-person company.

As the economy bounces back from the shocks of the Covid-19 pandemic, U.S. companies and small businesses have been competing for employees in a historically tight labor market. Employers added 6.7 million jobs last year, yet U.S. job openings and worker turnover are hovering near their highest levels on record. Those trends are spurring wage growth. Wages climbed 5.7% in January from a year earlier, government data show, nearly double the average gain before the pandemic hit.

 

Full off-cycle salary reviews remain relatively rare, surveys show, and executives say companies can turn to other options, such as using one-time bonuses, expanding benefits or adding vacation days, to help retain workers without boosting wages.

In a January survey by the consulting firm Mercer, roughly half of respondents said they didn’t plan additional reviews or salary increases to address inflation this year, though nearly a quarter said they were considering it. Around 20% of respondents said they plan to review off-cycle salary increases as needed in 2022. Only around 6% of the 2,565 human-resources managers who responded said they had decided to review compensation two or more times this year in response to rising prices.

“These tend to be persistent decisions” as employees get used to a new cadence of salary reviews and expect them to continue, said Tauseef Rahman, a partner in Mercer’s career business. Once companies put in place a new process, “it’s difficult to scale it back, so I suspect organizations are cautious.”

At CoorsTek, higher pay for new employees shrank the difference between pay for tenured workers and their newer counterparts, so the company now does a quarterly “compression” review. It wants to ensure that the experience of existing employees, who may have been hired in a less-competitive job market, is rewarded appropriately.

As a result, compensation expenses for the company’s critical roles rose about 10% last year, and CoorsTek expects a similar increase this year. It is budgeting several extra million dollars for pay increases on top of its usual 3% salary budget increase.

Production manager Austin Smith has seen more than 60% of the employees in his department receive pay increases thanks to CoorsTek’s new pay practices. He believes he too benefited last fall when he was promoted from department manager, and his pay went up at least 20%. “It was more than I anticipated, to be honest,” said Mr. Smith, age 28.

The quarterly cadence adds work for Ms. Lockridge’s team, and she has hired an additional compensation analyst and two specialists in workforce analytics. But the schedule also means CoorsTek can adjust quickly if the market softens. “If it slows down, the last thing you want to do is overspend at the beginning of the year,” Ms. Lockridge said.

TigerGraph Inc., an artificial intelligence startup with about 350 employees, moved to biannual pay reviews last year. “It wasn’t a decision we took lightly,” said Todd Blaschka, chief operating officer. “Just because there’s a review doesn’t mean there’s a guaranteed change in your compensation. So we have to manage expectations” for employees.

Salaries at the Silicon Valley firm, which nearly tripled its head count in 2021, have risen around 12% overall in the past 12 months, Mr. Blaschka said. The additional market data the company collects during its hiring helps set baselines for the biannual reviews. “We now learn where the market is going much more quickly,” he said, “and we can start predicting where things are going based on the data we’re gathering.”

The consulting and accounting giant Deloitte LLP typically raises employee salaries once a year, over the summer. Executives at the firm realized last fall they couldn’t wait that long to adjust compensation again. Deloitte U.S. conducted an additional pay analysis to study wages for its 120,000 employees, ultimately raising salaries for thousands of its employees at the end of 2021.

The surprise increases were aimed at keeping Deloitte’s pay competitive in a labor market where wages were rising quickly, said Joe Ucuzoglu, chief executive of Deloitte U.S. “Clearly, there’s upward pressure,” Mr. Ucuzoglu said, noting the firm made “adjustments where the market had moved.”

The increases coincided with efforts to bolster employee benefits, part of what Deloitte described as a $1 billion investment in its workforce. It is an open question whether the firm will consider off-cycle pay increases again, Mr. Ucuzoglu said. Much will depend on the strength of the labor market, he said, and the trajectory of wages.

A challenge in setting wages in the pandemic, human-resources executives say, is how quickly pay is changing, and for such a wide range of roles. Not only are companies eager to hire technical talent, but they also need more marketers, recruiters and professionals skilled at hiring.

At General Motors Co. , Kyle Lagunas, the company’s head of talent attraction, sourcing and insight, said he knows that many of the auto maker’s recruiters could increase their salaries by 20% to 30% by taking an offer with a rival. “We’re really looking at how we ensure that we can compete with what’s out there,” he said. “It’s just so crazy hot right now.”

Some executives have announced across-the-board pay increases during routine all-hands sessions, surprising workers. In October, Brian de Haaff, chief executive and co-founder of software maker Aha! Labs Inc., appeared on the company’s weekly Friday video call to tell its more than 100 employees that they would all be receiving a 10% raise, regardless of their tenure at the company.

“There was this level of surprise you could see in people’s faces,” Mr. de Haaff said.

The nine-year-old company based in Menlo Park, Calif., had never issued such an increase, and typically conducts annual reviews and pay changes on an employee’s hire-date anniversary. The timing of the October pay increase reflected strong operating results inside the company and, in part, a tight market for technology employees, Mr. de Haaff said.

Aha! made other changes to compensation, too, to more quickly reward employees. Instead of issuing one profit-sharing check to employees annually, the company last year split the payments into two, so employees can see the results of their work sooner. “Waiting for an entire year is a long time,” Mr. de Haaff said. “So we’ve shifted it.”