09 Apr The Dilemma of Maximums in Salary Structures
According to an HRsoft poll, 63% of companies surveyed freeze or cap base pay. While this leaves more than a third of companies that don’t, it’s becoming a more widely accepted way to control costs. In fact, many employers regard it as a “necessary evil,” as neglecting to enforce pay caps can result in overpaying people beyond market values.
Oftentimes, companies may freeze an employee’s pay, but provide bonus pay to make up for the difference. There are a few considerations to be mindful of if you intend to take this approach. For one, it may not result in cost savings at all, and for another, it communicates the idea that maximums don’t really exist after all. Finally, if you give pay increases as flat dollar amounts, you could risk violating the Fair Labor Standards Act for giving over-the-max bonuses. Bonus pay is considered part of the regular rate of pay, and must therefore be factored into overtime calculations. Be very cautious about using this approach to avoid facing legal ramifications during audits.
Additionally, it’s important to consider pay freezes from the perspective of your long-term employees. Astron Solutions performed research to identify the most common weaknesses long-term employees perceived in their organizations. Pension plan changes, use of pay range caps, and lack of information sharing about the organization and its finances were the top three complaints. These employees expect to be recognized for their dedication and years of service, and reported feeling dissatisfied by the pay compression with newer staff.
While pay compression and salary caps may be inevitabilities of having such a generational spread in the workforce, HR must still be sensitive to long-term employees’ thoughts and feelings on these matters. Ensuring long-term employees are kept in the loop with ongoing communication is one effective way to keep them engaged and feeling valued in spite of freezes or caps on base pay.
HRsoft is the trusted global leader in compensation management software whose COMPview solution is proven to control and simplify the full process and allocation of merit, bonus and equity awards to drive manager and employee engagement.