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."

Westinghouse and the Equitable Life Assurance Society have introduced an intriguing salary gimmick: they are giving their workers the choice of taking their annual raises in a single lump sum as soon as the increases are granted, rather than having them parceled out in paychecks through the year. Employees like this option because it allows them to use their raises to buy big-ticket items like cars, color TVs and refrigerators sooner rather than later, when they may cost more. But some employers fear that the practice of giving lump-sum raises, if it were to spread, might fan inflation by fostering a buy-now philosophy.

In negotiations on a new three-year contract with the United Rubber Workers this summer, the rubber companies agreed to a significant sweetener in the cost of living adjustment (COLA) provisions. Workers got an advance on anticipated COLA increases; in the first three months of the first year of the contract, for instance, an extra 200 an hour was tacked onto their paychecks, giving some 75,000 workers an extra $600,000 per week in take-home pay. Conceivably, such COLA advances could become widespread; at present 60% of all unionized workers are employed under contracts that have COLA provisions.

Another new compensation wrinkle that more and more employers are adopting is the Tax Reduction Act Stock Ownership Plan, or TRASOP. Under a law passed by Congress in 1975, a company can get an extra tax credit of up to 1% of its investment in new plant and equipment if it distributes that tax saving to employees in the form of company stock. The value of TRASOP to employees is lessened by the fact that they get the shares only when they leave the company. While this and other new departures in pay are engaging enough, most earners would probably agree with Daniel Lesh, manager of compensation at Honeywell Inc. Says he:

'With today's rapid rate of inflation, employees need money, not benefits. You have to put rewards in cash."

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