Globally, salaries are predicted to rise by an average of 5.9% next years, 1.9 percentage points above the projected average rate of inflation, according to new research from Mercer Human Resource Consulting. However, these aggregate numbers belie the challenges that global organizations face as they set their compensation budgets for 2007.

An array of economic and labor market factors - ranging from inflation, GDP growth and unemployment to aging workforces and increasing education levels in many countries - is shifting the labor supply and demand around the world. In fact, HR professionals around the world agree that their greatest rewards challenge today is attracting and retaining the right talent. (See Exhibit 1.)

These economic and labor market factors are affecting how organizations pay their employees. They want to allocate their resources strategically and in a way that generates the greatest return on these rewards investments. To do this requires a solid understanding of the dynamics at work today.

Geographic differences

Looking around the globe, the most obvious distinction in pay increase projections for 2007 is between mature economies and emerging or fast-growth economies. Inflation, GDP growth and pay increases tend to be lower in more mature economies, such as Canada, France, Germany, the US and the UK. In these countries, average pay increases will be between 2.0% and 4.0% in 2007. (See Exhibit 2.)

Meanwhile, in emerging or high-growth economies such as Brazil, China, Indonesia, Latvia, Lithuania and Paraguay, pay increases are expected to be much higher - in the range of 7% to 12%. In some emerging economies - such as Argentina and the Ukraine - high pay increases will be offset by equally high rates of inflation.

While pay increases tend to vary from country to country, employers around the world do indicate some important commonalities. In many parts of the world - the exception being some of the fastest-growing economies - employers are moving away from an emphasis on "buying" talent on the market. Instead, they are more interested in "building" talent from within. This is especially true for certain functional areas, such as sales and operations, where firm-specific knowledge and experience is beneficial.

This shift toward a "build" philosophy also is reflected in the approaches used to deliver rewards to employees. More than half of the organizations responding to Mercer´s "Measuring the return on total rewards" survey in Europe and the Americas (58% and 55%, respectively) plan to increase their investments in training and career development, while nearly half of the Asia/ Pacific respondents (48%) plan to do so.

Employers globally also share a broader definition of "rewards" today. In all three regions surveyed, nearly two-thirds define rewards as more than pay and benefits. By taking this more holistic approach, employers can make overall rewards decisions that balance employer needs (including affordable and sustainable costs) with a compelling value proposition to attract and engage employees. (See Exhibit 3.)

Strategic resource allocation through workforce segmentation

So how can organizations make reward decisions that reflect these global nuances and make the best use of their rewards resources? One promising answer can be found in a concept known as workforce segmentation.

Workforce segmentation refers to the process of identifying distinct workforce segments and developing unique rewards strategies for each based on factors such as business life cycle (defining skills/behaviors required at different stages of growth/decline), business design (determining the impact of an organization´s target markets and how it makes money), geography (identifying global consistency versus local focus) and brand impact (assessing employer desirability).

As a result of segmentation, employee groups may be characterized as:

• Performance drivers - the employee groups that create value for the organization
• Performance enablers - those that support value creation, and
• Legacy drivers - the employee groups that historically created value for the organization, but no longer do.

Workforce segmentation allows an organization to identify where to provide premium, standard or discounted rewards arrangements and pay mix (ratio of base pay to short- and long-term incentive opportunities) for different employee groups or segments. Perhaps the most obvious illustration is providing higher pay or pay increases for higher-performing employees. But there are other applications of segmentation as well.

For example, suppose your company is entering promising new markets in Eastern Europe and your sales and marketing employees are critical to capitalizing on the opportunities here. Based on workforce segmentation, these "performance driver" employee groups may merit a premium rewards arrangement. Or say that your business is driven by exceptional research and development, so you want to attract and retain the best global R&D talent to drive future success. Again, this employee group may require a premium rewards approach in support of an employment brand based on working in a leading firm.

However, in both of these cases, other functions, other geographies and other business divisions may not contribute as directly or strongly to business success. Some business units may even be in decline. As such, a standard rewards approach for "performance enablers" or even a discounted rewards approach "legacy drivers" may be most appropriate for these employee groups. It´s a matter of making rewards investments where they will generate the greatest return for the organization.

Summary

Through our survey findings and our consulting work, we see clearly that employers globally are striving to make better decisions about strategic resource allocation, using a variety of approaches to spend their rewards resources wisely to generate the greatest gains in productivity and profitability. Staying abreast of the shifting economic and labor market trends will be critical to success in the global environment, as will segmentation, which allows employers to differentiate pay to reflect the value that different employee groups create for the organization.

Exhibit 1

Top rewards challenges for HR professionals globally:

1.      Attracting/retaining the "right" talent

2.      Differentiating high performers

3.      Aligning rewards strategy to business direction

4.      Linking pay to performance

Source: 2006 Snapshot Surveys, "Measuring the Return on Total Rewards" (Asia, Europe, US & Canada), Mercer Human Resource Consulting

Exhibit 2

Projected 2007 annual base pay increase and inflation rates

(Ranked by difference pay increase over inflation)

Pay data covers five levels of employees: operations staff, clerical staff, technical staff, senior managers and executives. The percentage salary increases quoted in this release relate to the average of all employee categories and are forecast figures.

Source: Mercer Human Resource Consulting, 2007 Global Compensation Planning Report

Exhibit 3

Defining rewards globally

Source: 2006 Snapshot Surveys, "Measuring the Return on Total Rewards" (Asia, Europe, US & Canada), Mercer Human Resource Consulting