Human Resources: Some U.S. Employers Plan To Grant Smaller Raises In 2002

New York - October 30, 2001 - In response to the continuing economic decline, about one-fifth of US employers are adjusting their 2002 pay increase budgets downward, according to a new survey from William M. Mercer, Incorporated, a leading human resource consulting firm. Others are freezing pay altogether or delaying increases.

The national survey of more than 340 mid-sized and large employers, conducted in early October, asked employers whether their 2002 base pay increase budgets had changed from what the organizations initially reported in April as part of Mercer´s 2001/2002 US Compensation Planning Survey. Nearly two-thirds (65%) said their budgets had not changed over the past six months, while 28% indicated that they had adjusted their pay increase budgets. The remaining 7% were unsure of their plans.

However, of those making a change, about one-third (32%) actually had upped their pay increase budgets since April. The remaining 68% (about 19% of the total respondents) had cut their pay increase budgets. A small number (2% of the total respondents) plan to grant no base pay increases at all in 2002.

Employers that are making cuts generally are shaving about one to two percentage points from their original pay increase budgets, Mercer´s survey indicates. In April of this year, these employers reported 2002 average pay increase budgets of 4.4% to 4.6% for various employee groups. When surveyed again in early October, the employers said they now expect to grant average pay increases of 2.9% to 3.1% next year.

Employers that are boosting their pay increase budgets originally had projected lower-than-average pay increases for 2002 back in April. Their recent adjustments now bring their budgets above the national averages for all employee categories. The net impact of these upward and downward budget adjustments is a slight overall decline in pay increase budgets for 2002 for all survey respondents. (See Table 1.)

"The country was already in an economic slowdown when the September 11 terrorist attacks both reinforced the slide and slowed the recovery," says Steven E. Gross, who leads Mercer´s employee compensation consulting in the US. "This dramatic series of events is causing many employers to revisit their 2002 salary increase budget plans."

Even a small pay increase cut can be economically significant, Mr. Gross says, if enough employers take such action. "The direct impact is that people have less to spend or save next year, and we do not benefit from the ´pass-along´ effect of this money as it moves through the economy and is spent over and over," he says. In addition, he notes, there is an indirect impact as workers´ base salaries grow at a slower rate over time.

Budget freezes
Overall, only 2% of US employers currently plan to freeze wages in 2002, a number that has not changed since April. However, this freeze is likely to be applied unevenly across different employee groups. Mercer´s research shows that non-union hourly employees are least likely to be affected, while a higher percentage of executives, management employees, professional/technical employees, and nonexempt clerical/technicians will see their pay frozen at 2001 levels in 2002.

Mercer research shows that during the last US recession in the early 1990s, employers took similar steps to freeze pay increase budgets. However, Mr. Gross points out, while only 1% of all employers froze their pay budgets in 1990, that figure had climbed to 9% by 1992, indicating that more employers took this action as the recession lingered. "We would expect to see a similar pattern if the current recession continues," he says.

Frequency of pay increases
Mercer´s survey also asked employers whether they planned to change the frequency of their pay increases. The majority (86%) still plan to grant increases on an annual basis, although 11% said they plan to grant increases less frequently (e.g., on an 18-month schedule). A small percentage (2%) grants increases more often than every 12 months.

Employer actions
Employers will need to make many tough decisions regarding pay in the months ahead, Mr. Gross says - for example, how to allocate budgeted pay increases. "A company that plans to grant average pay increases of 3.5% in 2002 could give everyone a 3.5% raise or, perhaps the better option, could differentiate between high and low performers, giving high performers and employees with critical skills a larger slice of the pay increase pie," he notes. "Especially during tough economic times, you don´t want to give your best employees a reason to look elsewhere. You want to reward them for their contributions and keep their pay competitive."

Some employers also have to make tough decisions about whether to cut pay or to cut staff to survive the economic difficulties. "Companies need to think long and hard about how to ride out the downturn and where they need to be when we come out of it," Mr. Gross says. "Their strategy should be based on how quickly they expect to rebound economically."

If a business has prospects for a quick recovery - six months or less - a layoff is less appropriate, he says. The company may want to make a temporary reduction in salary, which then is reversed when the business recovers. On the other hand, if the problem is longer term - a year or more before recovery is expected - it may be wiser to cut staff and move forward with a core group of employees whose pay remains intact, he notes.

These statistics represent the preliminary findings of Mercer´s 2001/2001 Compensation Planning Survey Update. The final survey results will be available at www.imercer.com beginning in mid November.

Source: William M. Mercer, Incorporated