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. Last Updated: 07/27/2016

Companies Mulling Shift in Pay Systems

WASHINGTON -- The way Sandra O'Neal sees it, it's only a matter of time before annual base wage increases are a thing of the past in the American workplace.

O'Neal isn't some pie-in-the sky academic, some a futurist traveling far beyond the boundaries of reality. She heads the employee pay practice section of Towers Perrin, one of America's biggest management consulting firms, and she has a new survey to back up her beliefs.

More and more corporations, she says, have begun looking at new forms of employee compensation that would stop paying people on the basis of the jobs they do and begin rewarding employees for how well they do their jobs.

O'Neal isn't talking about merit pay systems. She says companies have been trying them for a number of years and they really haven't worked. "All merit pay systems become socialized," she says. "What we're looking at is a sea change in the way people get paid. It's beyond merit pay."

The type of change O'Neal sees taking place in the workplace would base an employee's pay on several measures of performance, starting with the overall performance of the company, the worker's department, any work team the employee might be involved with and the employee's own performance.

"The job-based world is breaking down. People are being asked to work on teams, and job-based pay isn't facilitating productivity anymore," O'Neal says.

To illustrate what she means by a job-based work force, O'Neal provides this example: You're in the airport changing planes and you're starving. The only food available is hot dogs, which are served at the bar. There's a long line at the counter, where one woman is trying to cope with demand. Next to her is a guy wearing a bow tie and vest, standing with his arms crossed. He's a bartender. He doesn't serve hot dogs. In the new world of pay, he will.

"He doesn't understand his job is customer service," says O'Neal.

To back up her predictions of change in the way people are paid, O'Neal has just completed a study of 750 midsized and large U.S. employers showing that more than three-quarters of the employers had gone through major restructurings within the past three years and are looking to make major changes in the way they pay their employees.

The study shows that 58 percent of the employers are engaged in a comprehensive review of their compensation strategy and 78 percent are seriously considering some form of competency-based pay system. But, at the same time, the survey shows that most employers are still just looking -- with the majority retaining traditional pay practices.

The most interesting aspect of the study, according to O'Neal, is the finding that nearly a quarter of the employers interviewed are considering the elimination of base pay increases and a shift to a system where the company would set a total compensation tavget and use a variable pay system based on a wide variety of performance measures.

It is this shift that O'Neal sees as inevitable. "In the new global economy, employers are asking which should we pay for: mere task performance or end results," he explains. "In the future we will be paid for skills and the abilities we bring to the job and how we apply those skills in the broader work context."

O'Neal predicts that this shift will mean less and less distinction for individual workers and more reliance on a person's ability to perform as a member of a broader team.

She acknowledges that, "there are some huge problems we will be facing as a society" as the pay of many blue-collar workers continues to erode. She said the effect of the shift will be to strip away the traditional middle layer of the work force, the semiskilled blue-collar worker, who for decades has been able to earn a middle-class income under pay systems that all but guaranteed annual wage increases.

"The new motivation [for workers] is a shift in skill values. Variable pay changes behavior," she said.