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2008 'Merit' Increases Projected To Hold Steady
 

   12/1/2007
 
Compensation & Benefits
   Compensation & Benefits Library - Salary Surveys/Comparison

2008 'Merit' Increases Projected To Hold Steady

By Stephen Miller, November 2007

Budgets for employee “merit” salary increases will again be modest in 2008, according to recently released forecasts, with "pay for performance" too often remaining a buzz phrase rather than an actual practice. Base pay increases also will vary based on industry and location.

Sibson Consulting pegs next year's increases at 3.9 percent for executive staff, 3.9 percent for exempt white-collar workers and 3.7 percent for nonexempt employees—the same base pay increase levels as in 2007.

Average Increases in U.S. Salary Budgets by Job Level:
2006 to 2008 (projected)

 

2006 Projected

2006
Actual

2007
Projected

2007
Actual

2008
Projected

Executive

3.8%

3.8%

3.8%

3.9%

3.9%

Exempt

3.7%

3.7%

3.7%

3.9%

3.9%

Nonexempt

3.6%

3.6%

3.6%

3.7%

3.7%

Source: Sibson Consulting.

“Although there is much talk about pay for performance, merit increases are treated as across-the-board increases in many companies,” says Jim Kochanski, senior vice president at Sibson Consulting. “Many managers don’t like to differentiate as to employee performance and use a small salary increase budget as a reason not to.”

-------------------------------------------------------------
Despite talk of pay for performance, annual merit raises
still are treated as across-the-board increases
at many companies.

-------------------------------------------------------------

Salary.com, a provider of on-demand compensation and talent management solutions, agrees that U.S. workers should expect modest pay Increases in 2008. The firm's National Salary Budget Survey likewise finds that salaries are budgeted to increase 3.8 percent on average next year, indicating a "steady but cautious" approach by employers who awarded the same average percentage increase in both 2007 and 2006.

The survey categorized budget increases for 2008 into three pay components:

      • General increase or cost of living adjustment (COLA). An increase for all employees designed to match increases in the cost-of-living

      • Merit increase. An adjustment based on individual performance

      • Equity/market adjustment. Adjustments made to bring individuals or groups to the estimated market level

2008 Average Planned Increases

Scope

General Increase

Merit Increase

Equity/Market Adjustment

Total Increase

Executives

3.3%

3.7%

1.5%

3.9%

Other managers

3.3%

3.6%

1.3%

3.8%

Exempt (non-managers)

3.3%

3.6%

1.3%

3.8%

Non-exempt

3.2%

3.5%

1.3%

3.8%

Source: Salary.com

Salary.com found that 64 percent of companies are planning no change in salary budget between 2007 and 2008, compared to only 26 percent who report a planned increase and 10 percent who expect a reduction.

Really Rewarding Merit

Related to this salary environment is employee dissatisfaction with how their job performance is managed. A recent Sibson survey conducted with WorldatWork found that a large majority of employees do not trust their organization’s performance management system and have little or no coaching and performance feedback from their bosses.

Despite the modest increases expected for 2008, organizations can be more effective in using the available money to attract and retain good employees and to improve performance. Sibson’s Kochanski suggests three ways for employers to do this:

Step 1.
Have a strong, clear performance focus throughout the organization.

Step 2.

Aggregate small-department merit budgets to cover at least 30 employees.

Step 3.

Set aside a pool of funds for top performers from the total merit budget.

“One of the keys is how this compensation information is communicated,” says Kochanski. “If all employees think they are going to get the full amount budgeted for salaries, then disappointment rather than motivation is the likely result.”

Modest fixed salary increases, adds Bill Coleman, chief compensation officer at Salary.com, "will force companies to find creative ways to reward top performers, such as implementing variable incentive programs or offering other non-compensatory rewards.”

Variations by Geography, Industry, Size

While overall salary increase budgets are expected to remain flat, differences in pay levels exist by industry, location and company size. “To attract and retain key talent, it’s important for companies to consider the data for their specific market when planning for next year,” says Christine Midwood, director of survey services at Salary.com.

The largest increases, according to her firm's survey, are forecast for professional, scientific and technical services jobs (4.2 percent), while jobs in the arts, entertainment and recreation industry are budgeted to receive the smallest increase (3.4 percent).

Larger salary increases are also expected on the West Coast. Workers in the Los Angeles and San Francisco metro areas, in particular, can expect larger than average increases (4.2 percent). The smallest increases are budgeted in the Kansas City (3.2 percent) and St. Louis (3.3 percent) metro areas.

Sibson Consulting also segmented its data by industry, as shown in the table below:

Average Increases in U.S. Salary Budgets by Industry/Job Level:
2006 to 2008 (projected)

 
   

2006 Actual

2007 Actual

2008 Projected

Banking and Finance

Executive

3.8%

4.0%

4.0%

Exempt

3.7%

3.9%

3.9%

Nonexempt

3.6%

3.9%

3.9%

Education

Executive

3.5%

4.0%

3.8%

Exempt

3.4%

3.8%

3.9%

Nonexempt

3.5%

3.8%

3.8%

Health Services

Executive

4.2%

4.2%

4.2%

Exempt

3.8%

3.8%

3.9%

Nonexempt

3.7%

3.8%

3.8%

Information Services/Telecommunications

Executive

3.6%

4.2%

4.1%

Exempt

3.6%

3.8%

3.9%

Nonexempt

3.5%

3.7%

3.9%

Insurance

Executive

3.7%

3.8%

3.9%

Exempt

3.8%

3.8%

3.8%

Nonexempt

3.6%

3.7%

3.8%

Manufacturing

Executive

3.8%

3.8%

3.9%

Exempt

3.6%

3.7%

3.8%

Nonexempt

3.5%

3.5%

3.5%

Nonprofit

Executive

4.0%

4.0%

4.1%

Exempt

3.7%

3.9%

3.9%

Nonexempt

3.7%

3.7%

3.7%

Retail

Executive

3.8%

3.7%

3.7%

Exempt

3.5%

3.6%

3.6%

Nonexempt

3.5%

3.5%

3.6%

Services

Executive

3.9%

4.0%

4.0%

Exempt

3.7%

4.0%

3.9%

Nonexempt

3.5%

3.9%

3.8%

Transportation

Executive

--

4.2%

4.1%

Exempt

--

4.0%

3.8%

Nonexempt

--

3.9%

4.1%

Utilities

Executive

3.9%

4.0%

3.9%

Exempt

3.6%

3.8%

3.7%

Nonexempt

3.5%

3.7%

3.6%

Source: Sibson Consulting.

 

Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area.

Related Articles: Pay for Performance

Pay for Performance: No Merit in Merit Pay , SHRM Online Compensation & Benefits Focus Area, June 2007

More Pay for Performance, but Message Not Getting Through , SHRM Online Compensation & Benefits Focus Area, June 2007

Make Merit Pay Matter , SHRM Online Compensation & Benefits Focus Area, February 2007

The Problems with Pay-for-Performance Plans (and What To Do About Them) , SHRM Online Compensation & Benefits Focus Area, January 2007

Rewarding Contribution, Not Job Title: A Base Pay Strategy To Retain Peak Performers, SHRM Online Compensation & Benefits Focus Area, January 2007

Related Articles: Compensation Trends

For Top Execs, Growth of Total Comp Also Outpaces Cash Comp , SHRM Online Compensation & Benefits Focus Area, September 2007

2008 Pay Projections: Increased Ties to Performance , SHRM Online Compensation & Benefits Focus Area, August 2007

For Middle Management, Salary Increases Exceed 2006 Numbers , SHRM Online Compensation & Benefits Focus Area, July 2007

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