Salary Budgets Are Flat—But Jobs and Skills Are Changing Fast

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So there are a number of different
skill sets that actually count equally

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or almost equally as AI skill sets.

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And you need to reward people that are
delivering value to the business, and

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that's what it really comes down to.

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Employees experience inflation
personally, and we acknowledge that.

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But companies have to
price labor competitively.

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Diana, your team has recently
published this new study called US

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Salary Increase Budgets 2026-2027.

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Title that just rolls
off the tongue, Diana.

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Yes.

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Welcome to the show.

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Thank you for having me.

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Yeah.

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So where can our listeners
find your new study here?

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They can find the study online.

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The headline for this study really
is that, Salary Increase Budgets,

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which is, yes, a very exciting
headline and a very exciting title.

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But they can find it at tcb.org?

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Tcb.org, absolutely.

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If you look under Centers, it's
the Human Capital Center, and it

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should be right at the top there.

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It should be right at the top.

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And we've been doing this report for 41
years, which is why we keep this title

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the same because it is a classic title for
anybody in compensation in the HR field.

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And for everybody in finance
who are trying to figure out

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how to plan for the coming year.

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So 3.5%.

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Talk about how the study was done.

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These are hundreds of companies
and a lot of input goes into this.

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It's not just a number
that comes out of thin air.

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No.

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We've done this for 41 years, like I said.

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We typically have between
300 and 400 respondents.

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It's a rather long survey, very detailed.

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Participation is high every year.

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Compensation experts and professionals
are very eager to participate

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because they want the data from this.

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Yeah.

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It's Really a great study, and we're
going to get into some more detail on it.

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But let's do talk about the top line.

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So what does 3.5% mean?

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There's a big range
around that, isn't there?

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There is.

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3.5% means it's pretty stable.

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It's been 3.5% for a
couple years right now.

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So if you look at 3.5% you might say,
"Okay, what does that really mean?"

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It's pretty consistent.

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And I think you have to say
there's got to be some cost

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discipline across the organization.

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But 3.5% doesn't mean
that things are static.

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I think it means that it's a
time for differentiation, too,

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and that's the difference there.

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It doesn't mean that
everything is the same.

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An interesting point here is that the
range in the study to whatever 95th

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percent confidence level is three to four.

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So it means that there is some
differentiation across different

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function skill sets people, right?

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So it's not just everybody
peanut butters it at one number.

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Absolutely.

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There is a range and also typically
when you look at that 3.5%, the

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merit is actually projected at 3.1%.

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And then there's this other category,
which is about half a percent.

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But you're right, the average is 3 - 4%.

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So there is differentiation and it is
not a 3% or 4% increase for everybody.

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In fact, you're going to see a
lot of people are going to be

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thinking very carefully about how
do I actually spend those 3-4% of

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dollars on my employees this year.

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Yeah.

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You talk in the study about
skill set recognition too, and

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one of the hottest topics is AI.

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And we'll talk more about it, but
there seems to be some degree of added

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reward for people who are adept at AI.

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They're really important
skills in a company right now.

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There is added reward for
people with AI skills.

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And in fact, in our research there
was a whole section where we asked

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specifically where is there a
premium paid for additional skills?

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Where would you pay for
additional skill sets?

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And there's a compensation premium
paid for AI skills at 37.8%,

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and that's what people cited.

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But I think you shouldn't look at
that and say, "Okay, that's exactly

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what we're going to pay for AI
only," because right behind that is

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a premium paid for leadership skill
sets and management skill sets at

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30.7%, and beyond that, data science.

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So there are a number of different
skill sets that actually count equally

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or almost equally as AI skill sets.

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So skill sets are very important, but it's
not just AI skill sets that count now.

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And you're talking in
the aggregate anyway.

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It's different by company, but AI
technical skills are rising to the

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top, which isn't surprising since
those are the huge growth areas.

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Yeah, and I think what companies need to
do is they really need to step back as

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they're looking at their organizations,
business leaders need to step back.

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They need to say, "What
is my business strategy?

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Which capabilities are
going to drive growth?

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Which are going to drive productivity,
customer value, innovation, transformation

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over the next three years, five years?

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Which individuals are going to
bring that, and how am I going

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to reward those individuals?"

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So that's really what we're looking at,
and if there's skill sets associated

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with that, yes, reward those skill sets.

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But it's not particularly AI skill sets.

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It's do I have AI skill sets that
are actually delivering value?

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It's not the AI skill sets in
particular, it's what they're

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delivering, and that's what we
really need to think about rewarding.

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And it, again, it
depends on what industry.

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If you're in the AI industry,
you're rewarding technical skills.

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Some of these comp packages for those
folks are just out of this world.

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If you're in manufacturing, it could
be people who are adept at deploying

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AI and robotics and so on and so forth.

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It's a different flavor
depending on where you sit.

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Exactly.

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As a business leader, you have
to keep coming back to where am I

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delivering value, and who are the
people that are delivering value?

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And you need to reward people that are
delivering value to the business, and

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that's what it really comes down to.

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Now, one of the key challenges
that I think most companies

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are facing is how do you grow?

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And we're in a higher inflation--
3.5% inflation-- era, while at the

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same time it's almost no growth
or sub 1% growth for most people,

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that aren't in the AI industry.

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Correct.

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It's a huge challenge to make
that equation work when you're

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growing your costs and you're
not growing your top line.

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How are HR professionals
dealing with that?

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You mean the inflation versus
you have a 3.5% budget?

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As an HR individual, you really
do have to acknowledge that your

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employees are dealing with inflation.

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You have to acknowledge that they
have that lived experience certainly.

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Their costs are rising.

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At the same time you're right, the
cost of labor is going up, and that

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really is the cost of labor, the cost
of goods, everything has to be anchored

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to that from a business perspective.

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So you really have to just as a
business person, you really have to

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anchor yourself to those expenses.

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Yeah, and you've been a huge advocate
of CHROs and human capital professionals

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wearing the business hat and partnering
with their finance for finance groups.

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Because you can't do this in a vacuum.

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So everybody wants to reward your people.

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You want to match inflation
because that's what they're facing.

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But at the same time, you've got
other constituents here, namely

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your owners or shareholders.

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You've got to produce the results.

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So it's a delicate balancing act.

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It is a balancing act, and I think you
just have to remind yourself that, you

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know, employees experience inflation
personally, and we acknowledge that.

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But companies have to
price labor competitively.

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And this is what we're doing.

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We're going out and we're saying, "How do
companies experience labor competitively?"

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That's what this research
report really does.

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It anchors it to the
competitive environment.

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And I will also remind everybody
that when you say this range is

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3.5% on average, 3-4%, the merit
increase is really about merit.

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It's not about a CPI.

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It is not a cost of living increase.

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It is about merit.

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And organizations really need to
think about the merit portion of this,

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3.1% on average, as a merit increase.

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And it should be distributed from a
merit perspective rewarding performance.

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And then that other category
should be distributed to deal

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with things like promotions.

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Equity.

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Equity, other, you know-

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Yeah.

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You know, all the…

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Other adjustments

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…
Need for skills and
other things like that.

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Sure.

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So it is not cost of living.

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It's a sad reality, but it's the reality.

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As a business, you have to deal
with the competitive environment.

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You also pay for promotions,
and you want to make sure that-

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You have to because you have to.

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You exist in a competitive environment.

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And you have to think about, how do
I retain and engage and acquire the

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kind of talent that I need to be
competitive in this current environment?

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Which also means that maybe the
balancing act is you do need to

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take action or act differently for
those people who are not performing.

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It's not just a numbers game,
but it's a productivity gain.

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And make sure the organization is
as effective as it needs to be.

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Exactly.

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Because that is going to be the best
for the business going forward and

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also for your employees who are in the
business and are productive and are

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delivering what they need to deliver,
and that's going to be the healthiest

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for your business going forward.

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Now, another thing organizations
can do and have done in the

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past is to take head count out.

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Let's just address it straight on.

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But we're sitting here at
nearly full employment.

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I don't know if people remember
this, but the number that we used

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to use economically was that 5%
was full employment, you could

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never get better than that.

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And here we are today near 4%.

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It means that the labor market is tight
despite the inflationary environment, so

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you want to be careful to retain talent.

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This is a COVID learning, right?

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We got rid of a lot of talent,
and then we had to go recruit

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it back at higher prices.

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And that's fresh in our memory.

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So that's the other flip side of it.

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It is.

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What's really interesting though, we
discovered in this report that the

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findings said that only 31% expect
headcount growth and 9% expect reductions.

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But if you look at that top line, what it
really misses is the movement underneath,

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because companies are restructuring.

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They're automating, they're upskilling,
they're talking about selectively

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hiring for critical skills, they're
talking about reducing work in

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other areas at the same time.

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What we're seeing is that even though
things may look static and the workforce

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may look like it's not getting bigger or
smaller, it is becoming very different.

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And so I think there's a lot of
movement underneath the surface

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that may be missed, which is making
this a very interesting story.

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So to your point, you have to be very
careful about rewarding the people who

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are developing the skill sets or have
the skill sets that are really adding

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the value that you need as you make these
changes underneath the surface in your

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workforce that we're seeing and that are
indicated by some of the other findings

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in this particular research report.

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So yeah, on the surface, it looks
really like there's not a lot happening.

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It looks pretty calm, pretty static.

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But then you start to dig into some of
these numbers and you say, "Wow, there

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is a little bit of undercurrent that
when you dig into it, there's a lot

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more happening here than meets the eye."

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A lot of stuff going on.

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For a while you couldn't pick
up a newspaper without reading

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that AI was going to kill jobs.

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Everybody was afraid that
they were going to be gone.

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In fact, that isn't happening.

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There are some AI job displacements
but there are a lot of AI job gains.

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So this underscores your point
that even within the narrow slice

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of the AI subject world, it looks
steady, there's dynamic change.

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Exactly.

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An organization could start the
year and end the year with basically

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the same headcount, but they could
have materially a very different

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mix of work within their organization,
different roles and different

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capabilities that they need within
that organization, which to your point,

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could be driven by how they're using
technology, potentially even AI, to change

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workflows, to change how work gets done,
which in essence is really exciting.

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I think the message to employees
and to managers is as you leverage

237
00:13:20,695 --> 00:13:25,115
these technologies as an employee,
it should serve you very well

238
00:13:25,145 --> 00:13:28,205
if you begin to get fluent with
some of these new technologies.

239
00:13:28,325 --> 00:13:30,955
Take advantage of what your
employer is offering you.

240
00:13:31,255 --> 00:13:33,155
Upskill yourself, reskill yourself.

241
00:13:33,205 --> 00:13:36,775
Be open to this, because it will
open up opportunities for you.

242
00:13:37,095 --> 00:13:41,005
Yeah, and it's interesting that you get
to the concept of change, and the majority

243
00:13:41,005 --> 00:13:42,925
of people will say, "I love change."

244
00:13:42,975 --> 00:13:43,835
It's not true.

245
00:13:44,015 --> 00:13:44,775
They don't.

246
00:13:44,875 --> 00:13:47,295
They do as long as it's somebody
else that has to suffer it.

247
00:13:47,295 --> 00:13:47,825
Because it's hard.

248
00:13:47,825 --> 00:13:48,475
It's stressful.

249
00:13:48,475 --> 00:13:51,915
Change is stressful particularly
when there's unknown, changes

250
00:13:51,915 --> 00:13:53,785
that could impact somebody.

251
00:13:53,785 --> 00:13:58,305
But, you and I were there in the
era when PCs were dropped into the

252
00:13:58,305 --> 00:14:00,335
workplace for the very first time.

253
00:14:00,335 --> 00:14:02,165
Before that, it was 100% manual.

254
00:14:02,175 --> 00:14:02,465
I was?

255
00:14:02,465 --> 00:14:02,925
I was.

256
00:14:03,175 --> 00:14:04,045
I don't know about you.

257
00:14:04,105 --> 00:14:05,285
Are you revealing my age?

258
00:14:05,355 --> 00:14:06,405
I didn't do that, no.

259
00:14:06,605 --> 00:14:10,445
But it reminds me of that era when
everybody was afraid, "What's going

260
00:14:10,445 --> 00:14:13,395
to happen?" And you remember you
got these little beige boxes and..

261
00:14:13,415 --> 00:14:16,475
I remember when email was, became a thing.

262
00:14:16,495 --> 00:14:16,955
Yeah, and

263
00:14:16,955 --> 00:14:19,045
We were all like, "What
is this email thing?"

264
00:14:19,055 --> 00:14:22,194
And you're always afraid of what
the latest and greatest either

265
00:14:22,204 --> 00:14:25,904
digital evolution or workplace
evolution will do to your jobs.

266
00:14:25,904 --> 00:14:30,634
But in fact, it has made
workforces, people more productive.

267
00:14:30,944 --> 00:14:33,499
Just think about automation
of assembly lines.

268
00:14:33,499 --> 00:14:37,433
People used to sit there and screw in
a taillight all day every day, and in

269
00:14:37,433 --> 00:14:40,913
fact it's all automated now, freeing
people up to do higher order work.

270
00:14:41,083 --> 00:14:44,333
So at a certain level, you
understand the fear but we all need

271
00:14:44,333 --> 00:14:47,123
to kind of take a deep breath on
these things and get through it.

272
00:14:47,123 --> 00:14:50,463
But it does, it puts some pressure
on the human capital organization

273
00:14:50,473 --> 00:14:51,943
to help marshal all this.

274
00:14:52,263 --> 00:14:52,863
It does.

275
00:14:52,883 --> 00:14:56,463
It gives the human capital
organization a huge opportunity.

276
00:14:57,723 --> 00:15:02,323
But they too need to see it as an
opportunity, and they too need to upskill

277
00:15:02,323 --> 00:15:07,163
and reskill themselves to be able to drive
that change through the organization.

278
00:15:07,563 --> 00:15:13,193
I think CHROs have a huge opportunity
to really step in and help drive that

279
00:15:13,193 --> 00:15:14,723
change through the organizations.

280
00:15:15,243 --> 00:15:23,663
And if they partner with CFOs and the
CEO, they can really be a very powerful

281
00:15:23,663 --> 00:15:30,593
force to help the organization really
rethink their whole ways of working.

282
00:15:30,633 --> 00:15:34,213
When people talk about the future of
work and the opportunity to really

283
00:15:34,223 --> 00:15:38,253
change their whole operating model, the
way they actually structure themselves,

284
00:15:38,493 --> 00:15:44,006
the process of working, the ways of
working, CHROs can play a fundamentally

285
00:15:44,376 --> 00:15:51,016
enormous role in helping the organization
through that and helping them in the

286
00:15:51,146 --> 00:15:53,996
managing that change in the organization.

287
00:15:54,456 --> 00:16:00,136
The final thing I would say around that
is the leadership required to push that

288
00:16:00,136 --> 00:16:05,206
kind of change through the organization
is huge, and thinking through the kind

289
00:16:05,206 --> 00:16:10,056
of leadership that you need and how to
develop that kind of leadership, recognize

290
00:16:10,056 --> 00:16:16,756
it, and then develop it is huge, which is
probably why you see the skill sets that

291
00:16:16,756 --> 00:16:21,626
are valued and being rewarded through
this, in this compensation report.

292
00:16:21,906 --> 00:16:30,056
Yes, 37% goes to AI, but that 30% going to
leadership and management skills, that's

293
00:16:30,056 --> 00:16:34,797
a recognition that is just as important,
and you need to reward those skills,

294
00:16:34,797 --> 00:16:38,557
Because those are going to be equally
as important as all this change and

295
00:16:38,557 --> 00:16:41,027
disruption happens within organizations.

296
00:16:41,397 --> 00:16:43,467
And speaking of leadership, one
of the things you and I have

297
00:16:43,467 --> 00:16:46,997
learned over and over again in our
careers is that the communication

298
00:16:46,997 --> 00:16:48,397
piece of this is so important.

299
00:16:48,477 --> 00:16:51,917
The natural tendency is to keep
all this quiet, confidential,

300
00:16:51,917 --> 00:16:54,767
don't explain anything, whether
you're talking compensation, merit

301
00:16:54,767 --> 00:16:58,547
increases, whatever the number is,
because, it's a kind of a secret.

302
00:16:58,557 --> 00:16:59,347
It's tense.

303
00:16:59,707 --> 00:17:01,607
But in fact, these are adults.

304
00:17:01,617 --> 00:17:04,527
People understand if you can
explain to them the reality.

305
00:17:04,527 --> 00:17:07,397
So if you're in a situation where
your business isn't doing well

306
00:17:07,937 --> 00:17:12,017
and you can't hit the average,
or whatever your situation is.

307
00:17:13,085 --> 00:17:16,875
You've said over and over again, it's
better off just explain it, share with

308
00:17:16,875 --> 00:17:20,915
your people what's going on, lay it all
out for them, and there will be better

309
00:17:21,035 --> 00:17:23,595
acceptance and enrollment in the concept.

310
00:17:23,895 --> 00:17:25,175
You are absolutely correct.

311
00:17:25,225 --> 00:17:26,735
That is always the case.

312
00:17:26,865 --> 00:17:30,805
Authenticity, transparency
wins every time.

313
00:17:31,545 --> 00:17:36,375
Every leader that approaches a
situation like that with authenticity

314
00:17:36,375 --> 00:17:41,535
and transparency earns the trust
and respect of their employees.

315
00:17:41,855 --> 00:17:46,735
And trust is fundamental in any
situation, especially situations

316
00:17:46,735 --> 00:17:47,815
that are difficult ones.

317
00:17:48,215 --> 00:17:54,035
And if you can earn the trust of your
employees, then they will then feel

318
00:17:55,767 --> 00:17:59,717
the-- I would call it-- the psychological
safety to then really believe you.

319
00:17:59,907 --> 00:18:03,787
If they feel you're authentic and they
can trust you, then they will believe

320
00:18:03,787 --> 00:18:08,807
what you say the next time and the next
time, and that goes a long way then.

321
00:18:09,327 --> 00:18:09,537
Yeah.

322
00:18:09,537 --> 00:18:11,447
People probably listening to this
going, "What does this have to

323
00:18:11,447 --> 00:18:14,267
do with salary increase budgets?"
These are emotional kinds of

324
00:18:14,267 --> 00:18:17,087
subjects that need some explanation.

325
00:18:17,087 --> 00:18:21,347
I think what we're saying is that the
leadership needs to start, obviously

326
00:18:21,347 --> 00:18:25,827
in the C-Suite, the CHRO, the CFO,
but it needs to be cascaded down

327
00:18:25,827 --> 00:18:30,487
so that managers can communicate
the reasons why, share with their

328
00:18:30,487 --> 00:18:33,137
people, and gain acceptance of this.

329
00:18:33,137 --> 00:18:34,317
You don't just lay it on them.

330
00:18:34,757 --> 00:18:36,984
You have to work it and
build that confidence.

331
00:18:37,034 --> 00:18:46,004
I think rewards have everything to do
with communication and frankly, emotions

332
00:18:46,084 --> 00:18:52,534
and honesty and trust, and you have to be
absolutely transparent about that as well.

333
00:18:52,534 --> 00:18:55,974
And people get very emotional about
their compensation, and if you

334
00:18:55,974 --> 00:19:00,794
can put the rewards in context and
help people understand how it is

335
00:19:00,794 --> 00:19:05,284
connected to their performance and
that they are really being rewarded,

336
00:19:05,524 --> 00:19:11,564
that this is a reward for what their
contribution is, and you can demonstrate

337
00:19:11,574 --> 00:19:16,154
that and they see that is really
happening within their organization.

338
00:19:16,924 --> 00:19:18,364
It has to be authentic, though.

339
00:19:18,394 --> 00:19:21,464
They have to see that happening
within their organization.

340
00:19:22,034 --> 00:19:26,804
Then they will see that's connected to
the business and their contribution.

341
00:19:26,814 --> 00:19:29,644
This is an important point,
also on total rewards.

342
00:19:29,654 --> 00:19:32,014
So it's not just about
salary increase budgets.

343
00:19:32,044 --> 00:19:33,424
It's not just about the merit.

344
00:19:33,824 --> 00:19:37,824
It's not, as you've said, it's not
just what's happening in the external

345
00:19:38,234 --> 00:19:39,924
economy and inflation and all that.

346
00:19:40,144 --> 00:19:43,254
You've got to put all of this
in the context of total rewards.

347
00:19:43,264 --> 00:19:46,094
So there's an opportunity here
as part of this communication

348
00:19:46,454 --> 00:19:48,044
to present the whole package.

349
00:19:48,044 --> 00:19:51,274
Okay, this is one slice, which
is your base salary, but look

350
00:19:51,274 --> 00:19:52,634
at all these other pieces.

351
00:19:52,674 --> 00:19:59,024
And the total rewards package is usually
30-35% higher than base and bonus.

352
00:19:59,144 --> 00:20:04,999
So you've got all of this going on
and should be communicated in context.

353
00:20:05,119 --> 00:20:05,979
Exactly.

354
00:20:06,259 --> 00:20:12,359
And frankly, nowadays, total rewards
should be all-encompassing because many

355
00:20:12,359 --> 00:20:18,169
employees, they look to compensation,
especially base pay, as sort of the

356
00:20:18,169 --> 00:20:22,109
table stakes, and they're looking for
a lot more from their organizations.

357
00:20:22,519 --> 00:20:27,769
They may look to development
as part of their total rewards.

358
00:20:27,829 --> 00:20:30,289
Do I have opportunity
within this organization?

359
00:20:30,299 --> 00:20:32,219
Am I going to be mentored and developed?

360
00:20:32,469 --> 00:20:33,829
Do I have a career path here?

361
00:20:34,039 --> 00:20:36,479
To them, that's part of total rewards.

362
00:20:37,179 --> 00:20:40,929
Things like even flexibility,
that's a total reward to them.

363
00:20:40,939 --> 00:20:44,439
Sometimes they value that more
than certain other things.

364
00:20:44,789 --> 00:20:48,669
Their total benefits, 401,
that's part of total rewards.

365
00:20:48,669 --> 00:20:53,609
So as managers think about
communicating that, they have to

366
00:20:53,609 --> 00:20:55,239
think about the total package.

367
00:20:55,459 --> 00:20:58,539
One of the things that came out in
your study is that roughly two-thirds

368
00:20:58,539 --> 00:21:03,739
of the organizations just rely on
salary-based or job-based salary ranges.

369
00:21:03,919 --> 00:21:07,329
And this goes back to the old Hay
points or the bands and so forth.

370
00:21:07,619 --> 00:21:10,909
But as you look at this today, how
should companies be thinking about

371
00:21:11,259 --> 00:21:13,529
modernizing their pay structures?

372
00:21:13,589 --> 00:21:16,628
Because again, it's not just
about what the budget is, it's

373
00:21:16,628 --> 00:21:18,358
about the whole construct.

374
00:21:18,688 --> 00:21:24,328
Yeah, I think you can't abandon
job-based pay because I think jobs

375
00:21:24,628 --> 00:21:29,148
still provide that architecture
right now for the benchmarking and

376
00:21:29,148 --> 00:21:32,788
the governance and the equity, so
we can't just walk away from it.

377
00:21:33,488 --> 00:21:37,618
Job descriptions definitely need to
be updated right now so that they

378
00:21:37,618 --> 00:21:39,298
reflect some of the current work.

379
00:21:39,748 --> 00:21:44,988
You have to begin to layer in some of the
new skills, and that will be happening,

380
00:21:45,128 --> 00:21:51,988
especially those skills that really are
adding value, that are really contributing

381
00:21:51,988 --> 00:21:56,998
to productivity or the skills that
are particularly scarce that you need,

382
00:21:56,998 --> 00:21:58,708
that you value and you're looking for.

383
00:21:59,318 --> 00:22:04,048
And maybe create new roles where
those skills are at a premium.

384
00:22:04,438 --> 00:22:09,328
You might begin to create sort of hybrid
roles, but I think you're still going to

385
00:22:09,328 --> 00:22:16,258
have a structure where in practice it's
going to end up still being jobs, but it's

386
00:22:16,258 --> 00:22:23,418
going to be jobs plus skills supported by,
you know, some kind of clear governance.

387
00:22:23,858 --> 00:22:28,128
I think you're still going to end up
having basically job-based structures.

388
00:22:28,638 --> 00:22:31,088
Earlier you were talking
about the various pools.

389
00:22:31,088 --> 00:22:34,109
You've got salary adjustments,
but you were talking about

390
00:22:34,209 --> 00:22:37,795
other adjustments, so there's
promotions, equity, critical skills.

391
00:22:38,115 --> 00:22:40,340
Let's call that a
strategic adjustment pool.

392
00:22:40,600 --> 00:22:47,350
How do you recommend people put a
strategic adjustment pool together

393
00:22:47,350 --> 00:22:49,480
and govern that and implement that?

394
00:22:50,978 --> 00:22:56,438
It sounds like a small pool when you think
about merit being 3.1 out of the three

395
00:22:56,438 --> 00:22:58,308
and a half, and maybe a half a percent.

396
00:22:58,478 --> 00:23:03,078
I think we call it, 0.5% to 0.7%
might be the other on average.

397
00:23:03,398 --> 00:23:06,602
But in actuality, it actually
can be quite substantial

398
00:23:06,602 --> 00:23:08,062
depending on your organization.

399
00:23:08,562 --> 00:23:13,732
So most of it really needs to be thought
of as a promotion pool because you really,

400
00:23:13,822 --> 00:23:17,572
as you said earlier, you really need to
think about who are the folks in your

401
00:23:17,572 --> 00:23:20,022
organization that need to be promoted.

402
00:23:20,732 --> 00:23:24,392
You do need to put governance in place
so that it doesn't become who has the

403
00:23:24,392 --> 00:23:26,362
manager who has the loudest voice.

404
00:23:26,942 --> 00:23:27,522
So you do need…

405
00:23:27,522 --> 00:23:28,862
There needs to be a fair process

406
00:23:28,862 --> 00:23:33,972
…
There needs to be a fair process in place
to think through that promotion process.

407
00:23:33,972 --> 00:23:37,852
Each organization has to figure out
what that looks like depending on what

408
00:23:37,852 --> 00:23:39,542
their management structure looks like.

409
00:23:40,032 --> 00:23:43,322
Because you don't want it to be
just, "Hey, I get to promote my

410
00:23:43,322 --> 00:23:48,362
friends because I'm whatever by
fiat because I like this person."

411
00:23:48,362 --> 00:23:49,692
Or you shout the loudest, yeah.

412
00:23:49,732 --> 00:23:50,692
You shout the loudest.

413
00:23:50,692 --> 00:23:50,852
Yeah.

414
00:23:50,852 --> 00:23:52,822
That's gotta be different than that.

415
00:23:52,862 --> 00:23:56,162
Final area that you talked about
with executive salaries, that's

416
00:23:56,162 --> 00:23:57,672
a whole different conversation.

417
00:23:57,672 --> 00:24:00,672
But in this case, it's governed
by the board of directors

418
00:24:00,712 --> 00:24:03,592
through the compensation or
talent committees directly.

419
00:24:03,812 --> 00:24:07,123
And bigger part of executive
compensation is variable pay, and

420
00:24:07,133 --> 00:24:08,853
lower portion is the fixed pay.

421
00:24:09,013 --> 00:24:13,813
A lot of boards are, in fact, not giving
merit increases or annual adjustments

422
00:24:13,833 --> 00:24:18,243
to base salary because they're
relying more on the variable comp.

423
00:24:18,403 --> 00:24:22,013
Just talk about now in this brave
new world that we're in, how should

424
00:24:22,023 --> 00:24:23,583
boards be thinking about all that?

425
00:24:24,383 --> 00:24:29,703
If you look at annual and, in particular,
long-term incentives, which are

426
00:24:29,703 --> 00:24:35,233
really where most of the executives'
compensation is focused-- AIP, when we

427
00:24:35,233 --> 00:24:40,813
looked at the study executives, typically
the target was at 40%, CEOs was at

428
00:24:40,963 --> 00:24:43,673
100%, sometimes that's a lot higher.

429
00:24:44,283 --> 00:24:49,243
We don't see a lot of change in
terms of how boards are looking to

430
00:24:49,293 --> 00:24:53,463
compensate or the metrics that they're
looking by which they compensate.

431
00:24:53,893 --> 00:24:56,923
They're typically still
very financially focused.

432
00:24:57,403 --> 00:25:04,283
If you think about where they're
focused on, I think it's 67% are

433
00:25:04,283 --> 00:25:06,603
saying their financial metrics.

434
00:25:06,713 --> 00:25:10,143
And I think the financial foundation
is probably not going to change.

435
00:25:10,583 --> 00:25:17,003
I don't think that we want to see anybody
rewarding things like the use of AI, or

436
00:25:17,313 --> 00:25:21,753
I think you do not want to reward things
like pilot volume or adoption alone.

437
00:25:21,753 --> 00:25:24,543
I think you need to define
measurable value first.

438
00:25:24,953 --> 00:25:29,133
If boards need to think about how
they apply AI-enabled productivity

439
00:25:29,133 --> 00:25:33,003
and workforce transformation, they
need to really connect the AI, the

440
00:25:33,003 --> 00:25:36,833
executives' incentives, to actual output.

441
00:25:37,193 --> 00:25:42,143
But I think 79% said they use financial
measures for executive AIP, and I

442
00:25:42,143 --> 00:25:47,573
think that's compared with 29% using
operational measures and 23% using

443
00:25:47,573 --> 00:25:49,233
strategic or non-financial goals.

444
00:25:49,513 --> 00:25:50,983
I don't see that changing a lot.

445
00:25:51,163 --> 00:25:51,373
Yeah.

446
00:25:51,523 --> 00:25:54,713
But the point here is it needs to be a
little bit more strategic, and it needs

447
00:25:54,713 --> 00:25:56,798
to be more long term and more variable.

448
00:25:56,938 --> 00:25:59,543
And I think your point is that's
not changing anytime soon.

449
00:25:59,653 --> 00:25:59,993
No.

450
00:26:00,073 --> 00:26:05,383
If you can reward the value created
by transformation and think about

451
00:26:05,393 --> 00:26:09,583
what are those values, what would the
transformation represent, how do you

452
00:26:09,583 --> 00:26:14,833
measure that transformation, as opposed
to just activities that were about

453
00:26:14,833 --> 00:26:19,323
transformation, then those are the metrics
that I think the board should focus on.

454
00:26:19,793 --> 00:26:23,903
It shouldn't be about the fact that
the transformation activity occurred.

455
00:26:24,963 --> 00:26:29,773
Your new report is called the US Salary
Increase Budgets, and it's again, at

456
00:26:29,783 --> 00:26:32,433
tcb.org under the Human Capital Center.

457
00:26:32,833 --> 00:26:36,193
Diana Scott, leader of the US
Human Capital Center, thanks

458
00:26:36,203 --> 00:26:37,203
for being with us today.