Dear Workforce What Are the Pros and Cons of Switching to Lump-Sum Payments as Compensation

By Staff Report

Dec. 3, 2004

Dear Bird in the Hand:

Why are you considering replacing your current pay-increase program with lump sums? Employers that implement this type of program usually do so for very specific reasons. Some companies want to control the growth of salaries that have climbed out of the appropriate market range. Other companies implement it because of financial distress. Still others try to make their pay-for-performance plans more effective by directing scarce dollars to top performers.

There are several advantages to lump-sum increases, but they apply to these very specific situations:

  • They allow companies to control wage growth and growth in the cost of goods or services by turning fixed salary costs into variable costs.
  • They permit companies to redirect increased dollars to specific areas or performance levels to motivate top performers more effectively.
  • They enable financially troubled companies to survive by reducing wage increases (and thus potentially eliminating the need for layoffs).
  • Used selectively, they can help bring salaries back into a competitive range (generally applied only to those employees above market).
  • However, the disadvantages of lump-sum programs include the following:
  • They can be hard to justify to employees; communication is difficult.
  • Unless other compensation elements are added or enhanced, top performers can lose motivation.
  • Your company’s competitive salary position will slowly deteriorate.

Probably the best reason to consider implementing a lump sum is if your company is experiencing significant financial distress. It can be an effective counter to layoffs—the lesser of two evils. The other reasons are harder to explain to employees, and require a very careful crafting of messages.

Employees need to understand why the company desires this change, what you are going to do to keep salaries competitive, and how you will satisfy top performers. In any event, use lump sums only temporarily.

SOURCE:Bob Fulton, The Chatfield Group, January 12, 2004.

LEARN MORE:Is There a Precedent for Compensating Different Employees with Different Incentives?

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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