Projected US Salary Increases For 2002

*   Estimated

Exhibit 1:   Ten-Year Trends in Base Pay Increases and Inflation

For the eighth straight year, base pay increases are expected to be just over 4%, with projections for more of the same in 2002, according to the 2001/2002 US Compensation Planning Survey from human resource consultants William M. Mercer, Incorporated.   However, an increasingly dim economic outlook for third and fourth quarter 2001 may cause some employers to rethink how and how much they compensate their employees.

Mercer´s new national survey of more than 1,500 organizations represents the pay practices affecting more than 14 million US workers.   Overall base pay increases being granted in 2001 and planned for 2002 - 4.4% and 4.3%, respectively - reflect a trend that dates back to 1994, with base pay increases holding steady while employers increasingly emphasize variable, or incentive, pay.   However, because inflation has been low, employees have seen real income growth over this time (see Exhibit 1).

Mercer´s new survey shows minimal differences in 2002 base pay increases among various employee groups, with executives expecting increases of 4.4% compared to nonunion hourly workers, who are projected to receive increases of 4.1% (see Exhibit 2).

There also is little variation by geography.   Average base pay increases for 2002 are expected to be 4.4% on the West Coast and in the South Central states.   Companies in other regions (Northeast, Southeast, and North Central) are projecting average pay increases of 4.3% for 2002.

More variation is seen by industry, however.   The highest average pay increases in 2002 are projected for computer software/services (5.6%), consulting/legal/accounting (5.1%), and telecommunications (4.8%).   The lowest average pay increases by industry are expected in agriculture (3.7%), followed by chemical, mining/milling/smelting, and paper and allied products manufacturing (all at 3.9%).

"Our survey, which was conducted during early second quarter, indicates that employers had planned to ´stay the course´ on base pay increases in 2001 and 2002," says Steven E. Gross, leader of Mercer´s employee compensation consulting in the US.   "However, as the year progresses, we find that more of them are thinking about alternative actions in case third and fourth quarter performance does not meet expectations."

Such actions, Mr. Gross notes, might include:

• Lengthening the time between salary increases from the typical 12 months to 14 months, 16 months, or even 18 months.
• Reducing average increase budgets by one or two percentage points, still reserving larger increases for top performers and employees with critical skills.
• Substituting incentive compensation opportunities for base pay increases, thus changing the overall mix of fixed and variable compensation costs.
• Using one-time, lump-sum awards in lieu of salary increases, thereby reducing fixed costs on an ongoing basis.

"Especially in difficult economic times, employers want to invest their reward dollars where they can most strongly influence employee behaviors and business results," Mr. Gross says.   "These are tough choices, but in recent years companies have made significant investments to recruit and develop talent.   They must maintain these critical skills and high performers, unfortunately sometimes at the expense of other employees."

Emerging practices

Mercer´s annual survey also looks at emerging practices in human resources, especially as they relate to compensation and performance management.   Key findings from this year´s survey include the following:

• The use of competency-based programs is increasing (these focus on the behaviors involved in performing a job in addition to what is actually accomplished).   This year, 19% of the survey respondents report using competency-based pay (up from 7% three years ago) and another 17% are considering doing so.   The use of competency-based performance management has grown from 20% to 28% over the same three-year period, and another 20% are considering it.
• The use of multi-rater feedback (when peers assess the job performance of their co-workers) has grown from 21% to 28% over the past three years, and another 18% of the survey respondents are considering using this approach.   With fewer levels of management and less overall supervision today, peers are often in a better position to gauge an employee´s performance, Mr. Gross notes.
• While 21% of the survey respondents currently have formal career planning, another 23% are considering implementing such a program, most likely as a means of capturing a return on their people investment.
• Currently, 36% of the survey respondents offer individual non-management incentives, but another 21% are considering such a program as a way to reinforce a pay-for-performance philosophy.

Mercer´s survey also shows that 57% of the companies surveyed now have incentive plans in place for employees below the executive/manager level, and 41% have increased the target payout opportunity for employees over the last three years.

The 2001/2002 US Compensation Planning Survey is one of 450 surveys conducted by Mercer in the US and around the world on topics related to compensation, benefits, and expatriate information.   The survey can be purchased by contacting Mercer at www.imercer.com or by calling 800 333 3070.  The cost is $75 for organizations that participated in the survey and $225 for nonparticipants.

William M. Mercer, Incorporated, one of the nation´s leading consulting organizations, assists employers in the areas of human resource strategy and implementation.   Headquartered in New York and with offices in 40 US cities, the firm is the US operating company of William M. Mercer Companies LLC, a worldwide consulting organization with more than 13,000 employees serving clients in 135 cities in 39 countries and territories.

CPI-U estimates provided by Economic Forecasting Center of Georgia State University

Exhibit 2 - Base Pay Increases

Source:   William M. Mercer, Incorporated