The survey, which was conducted in October and includes responses from more than 500 employers, provides an update to Mercer´s 2003/2004 US Compensation Planning Survey, conducted in April. At that time, US employers had budgeted overall average pay increases of about 3.5% for 2004. Now, with cutbacks planned by about 40% of the employers surveyed, overall pay increases for all employers are expected to average 3.3% in 2004.
The somber news about pay increases is compounded by other Mercer survey findings regarding short-term incentives (i.e., annual bonuses). Only about one-quarter of the employers surveyed said that incentive payouts would be larger in 2003 than they were in 2002. Far more said payouts would be equal to or less than 2002 levels.
Looking ahead to 2004, about half of the employers surveyed are projecting that 2004 incentive payouts will be equal to 2003 levels; about a third expect 2004 payouts to be greater than 2003 levels and the remainder expect 2004 payouts to be less than 2003 levels.
Average incentive payouts vary considerably by employee category. For example, executive-level employees are expected to receive average incentive payouts (as a percentage of base salary) of 31.5% in 2003, compared to 16.9% for management employees and 4.5% for nonunion hourly employees. Similar incentive levels are projected for 2004.
"We are still seeing a great deal of caution as employers approach the end of the year and finalize their pay-increase budgets," says Steven E. Gross, a leader in Mercer´s US compensation consulting practice. "In fact, a small number of employers still have budgeted no pay increases for at least some of their employees in 2004, indicating that they can´t afford pay increases - especially in concert with rapidly rising health care costs and pension funding requirements."
Mercer´s survey specifically asked employers whether they had lowered or were considering lowering their 2004 budgeted salary increases in light of these other cost factors. Thirteen percent said they had reduced their pay-increase budgets as a result of health care cost increases, pension funding requirements, or a combination of the two factors. Another 13% were considering this course of action as a result of one factor or both factors.
Even with lower pay-increase budgets, employers are attempting to differentiate the pay increases awarded to their top, average, and low performers. Mercer´s survey shows that the strongest performers will receive average pay increases of 4.8% in 2004, compared to 3.1% for average performers and 1.0% to the weakest performers.
"In the current environment, employers need to be concerned about their high-performing employees and those with critical skills," Mr. Gross says. "These are the employees they need most to help the organization pull out of a difficult economic period. Unless you reward these employees at a sufficiently higher level, you risk losing them when the economy gets better. If you can´t accomplish this through base pay increases, other actions may be needed to retain and motivate these valuable employees, such as incentives and rapid career growth."
The results of Mercer´s 2003/2004 US Compensation Planning Survey Update will be available at www.imercer.com