Business: Compensation Woe: How to Pay?

Lots of new wrinkles in benefits, but still a cry for cash

Managers, secretaries and production workers are painfully aware that when they get a pay raise, the extra dollars that they take home after taxes rarely begin to cover the increased costs they must bear. In the past year, as a result of the ravages of double-digit inflation, real incomes have fallen on average by more than 4%. What is less obvious is that the squeeze on purchasing power has become as much of a problem for employers as for employees.

Employers simply cannot hand out the kind of raises required to keep all their staffers fully abreast of 13%-plus inflation. Because taxes absorb part of any increase, a firm seeking just to keep "whole" an employee earning $15,000 or more must boost his pay by 16% to 19% this year alone. If high inflation persists, further raises would be necessary in subsequent years. Yet a company that gave increases of this size would not only be violating the Administration's 7% pay guideline but might also risk cleaning out its treasury.

As a result, employers are having a tough time paying people fairly, especially the strong performers who merit higher-than-average increases. In a period of nominal inflation, for example, a firm could afford to reward its superstars with raises of 12% or so because the average clock watcher would need to be given only, say, 2%. But with living costs soaring, pressures are high to grant underachievers heftier raises at the expense of the overachievers, so that many people wind up with increases in the 6% to 8% range. Laments Bruce Ellig, a compensation specialist at Pfizer Inc., the pharmaceutical firm: "The result is to reward mediocrity and stifle the encouragement of improved performance."

In the past, employers have sought to sweeten compensation by increasing the generally nontaxable benefits, such as health and education programs, and even company-paid memberships in fitness programs. Between 1967 and 1977 corporations raised the dollar value of these benefits at an average annual rate of 17%; over the same period, cash wages and salaries went up only 10% a year. Boosting benefits is much more difficult now; they are included in the guidelines calculations and are becoming costlier to provide, especially in the case of medical insurance plans. Last year such benefits rose by only 9.5%, and almost all of that increase reflected higher costs, not expanded programs.

Many companies are searching for ways to make their benefit packages more cost-efficient as well as more satisfying to employees. One innovation is the "cafeteria" plan, which allows employees to select their own benefits beyond a certain level of required medical, pension and life insurance coverage. For instance, a middle-aged bachelor might choose higher contributions to his pension plan in return for reduced medical benefits, which he does not need since he has no family. At American Can, employees can forgo, say, annual medical checkups in return for an extra week of paid vacation. Says Senior Vice President Sal Giudice: "A lot of young people opt for that. They want to take that winter ski trip."