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Salary Increases to Stay Consistent in 2012, with Focus on Variable Pay
Growing use of variable pay with lower salary increases represents the ‘new normal’

By Stephen Miller, CEBS  9/6/2011

While a slight uptick in salary increases in 2012 is projected compared to 2011, U.S. companies will continue to place the greatest focus on variable pay, according to consultancy Aon Hewitt's annual U.S. Salary Increase Survey.

The firm surveyed 1,494 large U.S. companies in June and July 2011, which revealed a 2.9 percent base salary increase projection in 2012 for salaried exempt, executives, salaried nonexempt and nonunion hourly workers. This was up slightly from 2011 for all groups.

Historical U.S. Salary Increases

  2007 (%) 2008 (%) 2009 (%)
(Record Low)
2010 (%) 2011 (%) 2012 (%)
(Projected)
Executives 4.0 3.9 1.4 2.4 2.8 2.9
Salaried exempt 3.7 3.7 1.8 2.4 2.7 2.9
Salaried nonexempt 3.6 3.7 1.9 2.4 2.8 2.9
Nonunion hourly 3.6 3.6 2.0 2.4 2.7 2.9
Union 3.3 3.4 2.2 2.5 2.6 2.7
Source: Aon Hewitt

“Three percent is the new 4 percent, meaning we are not likely to be back to the 4 percent levels of the late 1990s any time soon,” said Ken Abosch, Aon Hewitt’s compensation group leader. “Employees should keep in mind that despite employers anticipating increases, if current economic conditions continue, the 2012 projections may come in lower than anticipated.”

Salary Freezes to Decrease Again

The number of companies freezing salaries was down for the second consecutive year in 2011, and this trend is expected to continue into 2012. In 2011, 5 percent of organizations froze salaries vs. 21 percent in 2010 and nearly half (48 percent) in 2009. Approximately 4 percent of employers anticipate salary freezes in 2012.

Prevalence of Variable Pay Plans

Variable pay plans, or performance-based award programs where the award must be earned each year, reached an all-time high in 2011, with 92 percent of employers implementing this type of program. This is a significant jump compared to 2005, when just 78 percent of employers offered variable pay.

Economic pressures had a slight impact on variable pay in 2011.Organizations had anticipated spending 11.8 percent of payroll on these programs for salaried exempt employees. Instead, employers earmarked 11.6 percent of payroll for variable pay in 2011. Spending in 2012 is expected to dip slightly to 11.5 percent.

The survey shows that employers are budgeting to fund variable pay:

  • Based on company performance (86 percent of respondents).
  • Through reduced merit increases and reductions in head count (5 percent each).
  • Through reduced spending on benefits (2 percent).
  • Through pay freezes (1 percent).

“The growing use of variable pay, along with lower salary increases, represents the new normal in compensation practices for employers nationwide,” explained Abosch. ”This pay mix creates greater motivation for employees to be productive and greater flexibility for employers to compensate based on individual and company performance. However, this does create a need for performance discussions throughout the year, so employees know what they are doing well and areas for improvement in order to maximize productivity and potential pay opportunity.”

Pay Increases by City and Industry

According to Aon Hewitt’s survey, salaried exempt workers in some U.S. cities can expect to see salary increases higher than the national average in 2012. These cities include:

  • Detroit (4.0 percent).
  • Dallas (3.4 percent).
  • Chicago (3.0 percent).
  • Houston (3.0 percent).
  • Milwaukee (3.0 percent).

Cities that can expect lower-than-average increases in 2012 include:

  • Washington, D.C. (2.8 percent).
  • New York (2.7 percent).
  • Philadelphia (2.7 percent).

(Click here to view chart of salary increases by U.S. cities.)

The industries that can expect to see the highest salary increases in 2012 include:

  • Energy/oil/gas (3.6 percent).
  • Real estate (3.6 percent).
  • Construction/engineering (3.5 percent).
  • Telecommunications (3.2 percent).
  • Not-for-profit (3.2 percent).

The lowest increases are projected to be in:

  • Government (1.7 percent).
  • Building materials (2.5 percent).
  • Research/development (2.5 percent).
  • Rubbers/plastics/glass (2.6 percent).
  • Education (2.6 percent).

Other 2012 Salary Forecasts

The Salary Budget Survey of 773 U.S. companies, conducted by Towers Watson Data Services in June and July 2011, found that companies are planning pay increases that will average 2.8 percent in 2012 for their salaried nonexecutive employees. This represented a moderate increase from the average 2.6 percent raise workers are receiving in 2011 and 2.6 percent they received in 2010. Similar raises for 2012 were planned for executives and nonexempt employees (see "Moderated Pay Raises Foreseen, with Fully Funded Annual Bonuses").

A Mercer survey indicated that 97 percent of U.S. organizations were planning to award base pay increases in 2012, with an expected average increase for U.S. workers of 3 percent, up slightly from 2.9 percent in 2011 and 2.7 percent in 2010 (see "2012 Compensation Budgets Remain Lean, with Focus on Top Performers").

Hay Group reported that U.S. employees could expect median pay increases of 3 percent in 2012, consistent with salary increases for 2011 but below the 4 percent increases seen from 2005 to 2008 (see "Forecasted 2012 U.S. Base Salary Increases Remain Steady").

WorldatWork projected that salary budgets will rise by 2.9 percent in 2012 and that, based on individual performance ratings at year-end 2011, high performers can expect an average pay increase of 4 percent, middle performers a pay increase of 2.7 percent, and low performers an increase of 0.7 percent (See "More Employees to Get Raises as Pay Freeze Thaws").

SHRM members can receive links to online articles about 2012 salary forecasts and information on survey participation opportunities by visiting SHRM's Hot Topics Express Request web page and selecting the key term Salary Increase Projections under "Compensation."

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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