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2010 Salary Increases, Variable Pay Awards Lower than Expected
But spending on salaries and variable pay expected to increase in 2011

By Stephen Miller  9/1/2010

 

U.S. companies will spend less on pay raises and variable pay awards in 2010 than they originally expected, indicating their lingering concerns about the stability of the economy. But they are more optimistic about the future, with most expecting to bump up salary increases and variable pay awards in 2011, according to a nationwide survey by consultancy Hewitt Associates.

Hewitt's survey of more than 1,450 large U.S. companies shows that base salaries for salaried exempt workers rose 2.4 percent in 2010. These numbers were down from what employers projected in August 2009 (2.7 percent) but still higher than the record-low pay raises workers saw in 2009 (1.8 percent). The survey was fielded in June and July 2010.

Salary increases are expected to bounce back slightly in 2011. The survey reveals that:

  • For salaried exempt workers, salaried nonexempt workers and executives, base pay increases of 2.9 percent are expected. ("Salaried nonexempt" workers receive a weekly salary and overtime for each hour worked over 40 hours in a week.)
  • Nonunion hourly and union employees can expect salary increases of 2.8 percent.

“Going into 2010, employers were optimistic that they would be able to allocate more money toward compensation, but the lagging economy and lower-than-expected company performance forced many employers to revise their spending,” said Ken Abosch, leader of Hewitt’s North American broad-based compensation consulting practice. “We predict a similar situation in 2011. Right now, employers believe they'll be able to raise salaries next year, but if the economy remains unstable they'll be forced to readjust base pay increases to offset other spending or revenue shortfalls."

U.S. Salary Increases

 

2007

2008

2009

2010

2011 (proj.)

Executives

4.0%

3.9%

1.4%

2.4%

2.9%

Salaried exempt

3.7%

3.7%

1.8%

2.4%

2.9%

Salaried nonexempt

3.6%

3.7%

1.9%

2.4%

2.9%

Nonunion hourly

3.6%

3.6%

2.0%

2.4%

2.8%

Union

3.3%

3.4%

3.4%

2.5%

2.8%

Source: Hewitt Associates

 

Fewer Freezes

While 2010 salary increases are lower than expected, the news isn’t all bad, according to Hewitt. The number of companies freezing salaries in 2010 was down significantly, and this trend is expected to continue into 2011. In 2010, 21 percent of organizations froze salaries, compared to nearly half (48 percent) in 2009. Just 10 percent of employers expect salary freezes in 2011.

Variable Pay Expected to Rebound, Too

Like salary increases, spending on variable pay—performance-based awards that must be re-earned each year—was lower than expected in 2010, attributable in large part to lackluster company performance:

  • In 2010, spending on variable pay as a percentage of payroll for salaried exempt workers was 11.3 percent, down from a record high of 12.0 percent in 2009.
  • Spending in 2011 is expected to creep upward to 11.8 percent—which would be the second highest increase since Hewitt began tracking the data in 1976.

Hewitt’s survey shows that employers are—by and large—depending on company performance to budget for variable pay. However, some are looking at additional funding sources, including budgeting for variable pay through:

  • Improved company performance (76 percent of large U.S. companies).
  • Reduced merit increases (12 percent).
  • Reductions in head count (10 percent)

Just 5 percent of companies are budgeting for variable pay through reduced spending on benefits, while 4 percent are doing so through pay freezes.

“Rising spending on variable pay indicates a shift in overall pay philosophies,” explained Abosch. ”Rather than rewarding employees for years of service, employers are tying a greater percentage of workers’ pay to their individual performance and the overall performance of the company. Structuring compensation programs this way gives organizations greater freedom to adjust budgets based on the economy and their performance, rather than being locked into the fixed costs associated with increasing base pay.”

2011 Salary Increases by Industry and City

According to Hewitt’s survey, workers in some U.S. cities can expect to see salary increases higher than the national average in 2011. These include:

  • Washington, D.C. (3.4 percent).
  • Houston (3.3 percent).
  • Pittsburgh (3.2 percent).

Cities that can expect lower-than-average increases in 2011 include:

  • Philadelphia (2.5 percent).
  • Atlanta and Los Angeles (2.6 percent each).

The industries that can expect to see the highest salary increases in 2011 include:

  • Accounting/consulting/legal (3.3 percent).
  • Energy, aerospace, pharmaceuticals, construction/engineering and real estate (3.2 percent each).

The lowest increases are projected to be in:

  • Education (2.3 percent).
  • Metals fabrication (2.6 percent).
  • Automotive and forest/paper products (2.7 percent each).

Stephen Miller is an online editor/manager for SHRM.

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