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are relocated to a high-cost location. These COLAs are usually phased out over
a specified time, in the belief that annual raises and promotions will meet
the in- creased living costs of the area.80 The Bureau of Labor Statistics and
the American Compensation Association report that the difference between
salary increases and the CPI has been between O and 1.4 percent in the last
five years. Employees have begun to feel entitled to COLAs, so this negligible
difference between base pay and true merit is not enough to motivate higher
performances.
In many organizations, the employer provides an income bridge from employment
to unemployment and back to employment. This is severance pay. Typically, it
amounts to one Weeks pay for each year of service. About 25 percent of union
contracts require such severance pay. It doesnt guarantee a job, but it helps
the employee when a job is lost.
In times of layoff, the basic security for most employees is their seniority.
If an organization is unionized, the contract normally specifies how seniority
is to be computed. Seniority guarantees jobs (and thus compensation) to
employees with the longest continuous employment in the organization or work
unit. Even in non- unionized situations, a strong seniority norm prevails,
which gives some security to senior employees.
Pay Compression
Pay compression occurs when employees perceive too narrow a difference between
their own pay and that of their colleagues.82 Many companies in the United
States face a narrowing of a gap between senior and junior employees and
between super visors and subordinates.83 Differentials of 10 percent or less
are not unusual, and in some instances junior employees are brought in at
salaries greater than those of their superiors. The resulting low morale can
lead to Decreasing productivity and higher absenteeism and turnover. One way
to identify pay compression is to examine the relationship between salaries
and incumbents years of experience with the company.