GE Studies Scrapping Annual Raise in Nod to Shifting Priorities

GE Studies Scrapping Annual Raise in Nod to Shifting Priorities

June 6, 2016
"Big companies want to be like small companies,” said  Ranjay Gulati, a professor at Harvard Business School. To get there, he said, GE is “willing to take on what may look like some sacred cows.”      

General Electric Co. (IW 500/6) is the laboratory of American management. So when the manufacturing giant says it’s rethinking a bedrock tradition of corporate life -- the annual raise -- you can bet that C-suites everywhere will be watching closely.

GE executives are reviewing whether annual updates to compensation are the best response to the achievements and needs of employees. The company may also scrap the longstanding and much-imitated system of rating staff on a five-point scale. Decisions on both issues may come within the next several months, spokeswoman Valerie Van den Keybus said by phone.

“We uncovered an opportunity to improve the way we reward people for their contributions,” Janice Semper, GE’s head of executive development, said in an e-mailed response to questions. She said it will involve “being flexible and re-thinking how we define rewards, acknowledging that employees and managers are already thinking beyond annual compensation in this space.”

In the upper reaches of the U.S. labor market, a broader shift in benefits is already under way. Businesses are competing over younger workers for whom other perks may be as important as pay, and senior employees looking for more flexibility as they near retirement. To lure and retain talent, they’re ready to reconsider everything from parental leave and paid time off to when and how performance is rated.

Netflix Inc. said last year that employees can take a year off for child care, and many more companies including Adobe Systems Inc. are offering at least six months. Goldman Sachs and Microsoft Corp., as well as GE itself, are among employers to announce an overhaul of performance review systems in the past year.

Ending annual raises hasn’t played much part in the conversation -- yet. When GE considers something like that, “other companies will do it too,” said Ranjay Gulati, a professor at Harvard Business School.

“People are looking for more flexibility, not more pay necessarily,” he said. “Relying on annual rhythms makes it artificial.”

If America’s most-skilled employees can increasingly order up bespoke packages from their bosses, something like the opposite is happening at the bottom end of the labor market, where temporary or contracted-out jobs with limited benefits make up a growing share. Less than a quarter of all companies in the U.S. offer parents any paid time off, and only about 44% of workers qualify even for guaranteed unpaid leave. The gap is fueling concern about rising inequality, and Democratic presidential candidates are backing efforts to enshrine longer parental and sick leave in law, rather than leaving it to the whims of employers.

Across the corporate world, few practices command such broad assent as the annual raise.

Only 1.2% of U.S. companies use a discretionary timescale for increasing base pay, according to this year’s compensation survey by Mercer LLC. About 90% of companies have a fixed date when everyone receives their raise, assuming one is granted, while about 5% make the change for each employee on the anniversary of their hiring or move to their current job.

The idea of a fixed raise-day took root in the 1960s, said Steve Gross, a senior partner at Mercer. Before that, with inflation so low that stores often painted prices on their windows because they rarely changed, employees would typically get a pay increase when they changed job, rather than as an annual event, he said.

Now, with younger workers in particular staying with companies for shorter spells, a year may be too long to wait, Gross said. “It’s more like employees are serving tours of duty and you need to get them to re-enlist and get them re-engaged,” he said.

The 124-year-old GE, one of the original dozen members of the Dow Jones Industrial Average, has long been a trend-setter. Its management ideas are taught at business schools, and its executives have moved on to head other major companies. The review system championed by former CEO Jack Welch, in which the worst-performers were fired, spread widely.

Current CEO Jeffrey Immelt says he’s seeking to simplify the company and streamline decision-making. GE recently introduced a new method of performance review centered around a phone app called PD@GE that employees use to assess both subordinates and superiors. It aims to replace a once-a-year conversation with rolling feedback.

It was during discussion of that new system, which will be extended to most of the company’s 185,000 white-collar employees this year, that the company decided it will also review the timing of compensation changes, Van den Keybus said.

Some of Immelt’s overhaul draws inspiration from Silicon Valley, whose startups are disrupting many established business practices.

“The fascinating juxtaposition today is, big companies want to be like small companies,” Harvard’s Gulati said. To get there, he said, GE is “willing to take on what may look like some sacred cows.”

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