New skills, Millennials and the gig economy are changing the way workers are paid
The trend away from traditional full-time employment represents a massive shift in the workplace with profound implications, said Ravin Jesuthasan, managing director and global practice leader at Willis Towers Watson, speaking at the June 2016 Total Rewards Conference in San Diego. The annual event is sponsored by WorldatWork, an association of compensation and benefits professionals.
“We are at the beginning of a fourth industrial revolution,” marked by technological breakthroughs including artificial intelligence, robotics, ubiquitous social media and the interconnectivity of virtual everything, he explained. Then add into this transformative mix nanotechnology, 3D printing, biotechnology, and smart systems that provide guided technology for factories, farms, grids and cities.
“This is disrupting industries and impacting jobs,” said Jesuthasan, resulting in:
- Significant job creation and demand within science, technology, engineering and math (STEM) fields, but also widespread and growing job displacement in other sectors.
- Heightened labor productivity but also widening skills gaps, revealed by a growing skilled-worker deficit and a low-skilled worker surplus. Many of those lacking in-demand skills are recent college graduates.
The disappearing jobs will greatly outnumber the creation of new positions, he noted, with losses particularly acute in office support/administration and manufacturing/production positions. Gains, however, are being seen in management, business and finance positions, as well as in the STEM-related fields. But even here, “with positions such as software developer, there are decisions about whether these should be full-time internal jobs or contracted out as task-specific outside assignments,” which can result in big savings on cost-to-hire and training expenses, and avoid the future costs of salary growth and employee benefits.
In the future, organizations will become a malleable set of functions, and deciding which ones get done inside the organization will be a key strategic question, Jesuthasan said. One consequence will be fewer employees and more partnerships with independent contractors, along the lines of the Uber/Lyft ride-hailing services “gig economy” model.
As this transition occurs, Jesuthasan noted, employee rewards are shifting “from collective and consistent to increasingly individualized and differentiated, with organizations continually optimizing the cost/value relationship with talent. And HR is tasked with navigating this new landscape.”
Consumer-Driven Total Rewards
“The increased speed at which information, people and goods move is changing the concept of what work is and how and where it gets done,” concurred Tom McMullen, vice president and reward practice leader at Korn Ferry Hay Group.
“Organizations are becoming more proactive in assessing what employees value the most—and the least—in their rewards programs, using employee surveys and focus groups,” he noted. “And they’re cutting back on rewards viewed as having less value.”
“Employee pay preferences matter more than ever when it comes to effective rewards program design,” said Dow Scott, professor of human resources and employment relations at Loyola University, Chicago. Like McMullen, he pointed to the importance of measuring employee reward preferences, “even if it means taking people off the line” to participate in focus groups.
This doesn’t mean catering to employees’ every wish and whim, Scott noted. But tailoring benefits to meet employees’ needs can help attract in-demand talent while increasing engagement and retention.
“Most HR programs in place today were created by Baby Boomers for Baby Boomers,” noted John Bremen, managing director of total rewards for the Americas at Willis Towers Watson. “The total rewards programs of tomorrow will emphasize employee choice. And the good news is that companies already are doing this,” from providing a range of employee-paid (but employer-negotiated) voluntary benefits to expanded health plan options offered through private health care exchanges.
Segmentation, personalization and customization—all terms for tailoring benefits to specific demographic groups, and even down to individual employees—are becoming bywords for how to attract and retain younger workers, several presenters noted.
As for Millennial workers (born 1980-95), who will soon be a majority in the workforce, and Generation Z (born 1996-2010), just now entering the workforce, “If we can provide what they want from work—especially career-growth trajectory—we can earn their commitment and loyalty and increase Millennial tenure to 6-7 years instead of 2-3 years,” said Mel Stark, vice president at Korn Ferry Hay Group.
Younger workers often expect a more-customized rewards package, for instance, where employees are provided a set amount of dollars to choose among benefit offerings, several presenters noted. “Yes, it’s complex, but we have so many more tools now, so that with technology we’re able to do it,” said Lori Wisper, director of rewards, talent and communication at Willis Towers Watson.
But the shift to customization “needs to be explained, otherwise employees will perceive it as a cost-cutting exercise,” cautioned Scott.
Future of Compensation
Stark and McMullen’s predictions about base pay trends, based on Korn Ferry Hay Group research, included the following:
- Classic base pay systems will remain under stress due to shortages of STEM/skilled employees and a glut of less-skilled workers.
- Increasingly customizing jobs for individual employees will make it difficult to match these positions with pay survey data.
- The growing variety of employment relationships will require different pay structures.
In terms of variable pay, they said to expect:
- A slowdown in the trend of increasing variable pay eligibility and amounts.
- Emphasis on using variable pay to reward collaboration, such as by increasing team incentives.
- An increase in the use of spot and peer recognition cash rewards.
Stark also foresees a swing back to concrete, measurable objectives “to make sure pay plans line up with behavior [that] management wants to support and reward.”
“It’s OK to have turnover, as long as it’s the right turnover,” said Elliot Santner, senior director of compensation and benefits at products distributor W.W. Grainger Inc. “We may lose some folks, but it should be the right folks.” That’s why, in an increasingly competitive world, rewards and incentives should be tied to recruiting and maintaining workers who meet your organization’s strategic needs.
At the same time, to attract the talent that organizations need, the importance of fairly rewarding people will increase, said McMullen. The need to ensure that pay is perceived as fair is being driven by:
- The movement towards greater internal and external transparency in workforce pay, such as on social media websites.
- Increasing executive pay transparency, including CEO pay ratios at public companies, which must be disclosed starting in 2017.
- Pay equity legislation.
- Minimum-wage and living-wage proponents.
- Lower unemployment (at least for in-demand, skilled positions).
Finally, McMullen pointed to the growing trend of engaging and retaining talent with nonfinancial rewards, including:
- Supporting employees’ skills growth and professional development.
- Taking advantage of that growth by creating more flexible and personalized career paths.
- Communicating a strong value proposition for staying with the employer (total rewards and career development).
- Communicating a greater sense of purpose and meaning in the work.
“People want to feel connected to something bigger than themselves,” McMullen noted, and this is especially true of younger workers.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.