This would mark the third consecutive year - corresponding to the economic downturn - that annual pay increases have been less than 4.0%. For a stretch of eight years prior to 2002, annual pay increases averaged 4.1% to 4.4% before dipping to 3.8% in 2002.
The figures above include data from employers who are planning to freeze salaries for at least part of their employee population in light of current economic conditions. When these 0% pay increases are removed from the calculations, pay increases average 3.6% for both 2003 and 2004 among employers who are planning to grant a pay increase of some level.
The projected 2004 pay increases vary by employee group, with executives slated to receive the largest increases next year (3.7%) and nonunion hourly employees slated to receive the smallest increases (3.4%). (See Table 1 for additional detail.)
As the economy continues to struggle, employers are maintaining a very cautious approach to pay increases, according to Steven E. Gross, a compensation consulting leader at Mercer.
"In the current environment, employers are less concerned with ´chasing the market´ in terms of pay," he says. "Today, they are more internally focused on what they can afford. They can do this because the balance of labor supply and demand has tilted in their favor, at least temporarily."
However, he notes, lower pay-increase budget levels have created a new challenge for employers - allocating the pay-increase "pie" based on employee performance. "With a budget of just over 3.0%, it´s hard to make a meaningful differentiation between a top performer and a low performer, and it forces employers to make hard choices," Mr. Gross says. "In order to give their outstanding employees a 5.0%-plus raise, employers may need to consider giving no pay increase at all to employees with sub-par performance."
Salary freezes
A small but significant minority of employers (12%) indicated that they froze salaries for at least some of their employees in 2003 (for instance, executives received no pay increase but all other employee groups did). The figure for salary freezes was 16% in 2002. Very few employers have indicated that they will freeze employee pay in 2004, Mr. Gross says, largely because they expect the economy to improve before then. "The 2004 projections reflect some optimism on the part of employers," he says.
The prevalence of salary freezes varies by industry. For executives, salary freezes were most common in 2003 for the computer software/services industry (28% froze executive pay in 2003) and real estate (25%). At the other end of the spectrum, executives in research and development and pharmaceutical/biotechnology firms were unaffected by salary freezes. (See Table 2.)
Other trends
Mercer´s study also examines emerging practices with respect to reward programs. Among the findings this year:
- For the fifth year in a row, non-monetary recognition awards continue to top the chart in terms of prevalence, with 72% of responding organizations offering them and another 11% considering them.
- As pay increase budgets shrink, 53% of survey participants continue to use spot cash awards (up from 48% five years ago) and another 8% are considering implementing such awards.
- Individual non-management incentives are currently offered by 38% of the respondents and another 15% are considering implementing such awards.
- With pay perhaps less of a motivational factor for employees today, employers are paying more attention to employee careers. One-fifth (22%) of respondents currently have formal career planning, and another 20% are considering implementing it.
- Competency-based performance management is currently used by 34% of the respondents, but another 18% are considering this approach. "Such trends reflect the fact that employers today are placing a greater emphasis on building talent from within versus buying talent on the market," Mr. Gross says. "They want to spend their time and resources to develop the employees who already have demonstrated commitment to their companies."
"With annual pay increase budgets at their current levels, employers increasingly are looking to variable pay and other reward programs to attract, motivate, and retain their best employees," Mr. Gross says. In fact, when asked whether they had increased the number of employees eligible for short-term incentives since 2000, 22% of the survey respondents said yes, 8% said no, and the remainder (70%) said they had made no change in eligibility.
Mercer is producing a brief web presentation based on the results and implications of the 2003/2004 US Compensation Planning Survey. The presentation can be viewed at www.mercerHR.com/compensation2004 . For additional information or to purchase the full survey report , visit www.imercer.com/cps.
Table 1: Pay increases
* These figures do not include the 0% salary increases planned by some employers. They include only data from employers that are planning to grant pay increases of some level in 2003 and 2004.
Table 2: Salary freezes by industry (for executives)
Source: Mercer Human Resource Consulting, 2003/2004 US Compensation Planning Survey
Table 3: Emerging reward practices
Source: Mercer Human Resource Consulting, 2003/2004 US Compensation Planning Survey