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U.S. Salary Increase Budgets Barely Matching Inflation
Survey shows lowest level in 25 years

By Stephen Miller  2/15/2010
 

With total salary increase budgets in the U.S. barely exceeding inflation, even top performers might be disappointed to discover that their 2010 raises—in many cases following a year of frozen compensation—are only keeping up with cost-of-living increases, according to The Conference Board’s Salary Increase Budgets for 2010—Winter Update report.

Projections for 2010 show that salary increase budgets in the U.S. will be below 3 percent for the first time in more than two decades, and projected 2010 salary structure adjustments for all categories of employees are not expected to top 2 percent—well below the inflation rate (2.6 percent) forecast by The Conference Board, a not-for-profit business research association.

Salary increase budgets—the pool of money that a company dedicates to salary increases for the coming year. It is represented as a percentage of current total base pay.

Salary structure adjustments—the changes (usually annual) to the salary structure of a compensation program. Organizations make these adjustments to the minimum, midpoints and maximums of their pay ranges to account for changes in the cost of living generally, and to changes in the salary markets within their industry.

“Compensation professionals usually make sure that the salary structures move in lock step with inflation in order to ensure that structures represent market rate for jobs,” says John Gibbons, human capital program director at The Conference Board. “They budget increases in a particular year to reward great performance, allowing earnings to exceed inflation and move people up through the ranges. Salary ranges also represent employers’ anticipation of what the job market will require. Projections of near zero percent in real terms mean that employers are making the assumption that the salary market is simply not going to move up, regardless of increases in the cost of living.”

“U.S. workers will continue to face downward pressure on their salaries and wages,” predicts Linda Barrington, the association’s human capital managing director and co-author of the report. “Without the purse strings loosening on financial rewards, employers are going to have to rely on other ways of engaging employees—especially top performers—in order to keep their companies competitive.”

Historical Low

The revised median forecast of salary increase budgets for 2010 stands at 2.8 percent for all U.S. employee groups except executives (2.75 percent). This is the lowest level in the 25-year history of The Conference Board survey.

This historical low is consistent with historically low growth in government compensation measures. According to the U.S. Bureau of Labor Statistics’ (BLS) Employment Cost Index, total compensation in 2009 grew by 1.5 percent while consumer prices rose by 2.7 percent—meaning that, adjusted for inflation, total compensation fell by almost 1.3 percent. The Employment Cost Index’s increase is the lowest since the BLS survey began in 1982; prior to the 2009 recession, the 12-month change never fell below 2.7 percent.

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Adjusted for inflation, total compensation
fell by almost 1.3 percent in 2009.
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“Despite five months of improvement in The Conference Board’s Employment Trends Index suggesting that a turning point in job growth is on the horizon, recovery in compensation is probably a few years away,” says Gad Levanon, associate director for macroeconomic research at The Conference Board. “In the previous three recessions, compensation began accelerating only several years after employment bottomed. High levels of unemployment allow businesses to limit raise demands from existing workers and hire workers from unemployment at lower compensation levels.”

Expectations Revised Downward

The Conference Board’s Annual Salary Increase Budgets Survey, conducted in November 2009 among 285 U.S. organizations, represents a sharp drop from the 3 percent median forecasted for salary increase budgets in April 2009. More than a quarter of respondents (27.7 percent) said they had already changed their originally projected total increase budget for 2010. The median projected total salary increase budget for this group, 2.5 percent, is lower than that of respondents overall. Compared with their original median projected increase budget, the current median projected 2010 salary increase budget for these respondents is 0.5 percentage point lower than what they report as their original forecast for 2010.

The highest forecasted median salary increase budgets for 2010 are in consulting services—3 percent for all employee groups except nonexempt hourly, which stands at 2.85 percent. The second highest projections are reported in the trade sector, with all employee groups at 3 percent except nonexempt hourly (2.5 percent). The lowest 2010 increase budgets are in the banking industry (2 percent).

Bonus Budgets Slightly Higher

For merit increase budgets forecast for 2010, the median is 2.5 percent in each employee category for all industries. This compares to lower 2009 medians of 2.1 percent for nonexempt hourly, 2.38 percent for nonexempt salaried and 2 percent for exempt employees.

The median merit increase budget for executives in 2009 was zero. The highest median projected merit increase budgets for executives are in energy/agriculture, manufacturing and trade, at 3 percent.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Small Increases Seen in Pay, Benefit Budgets, SHRM Online Benefits Discipline, February 2010

Still Cautious, Employers to Hold the Line on Pay, Benefits in 2010, SHRM Online Compensation Discipline, January 2010

Businesses Continue to Battle Economic Crisis, SHRM Online Business Leadership Discipline, January 2010

More U.S. Employers Granting Pay Raises in 2010, SHRM Online Compensation Discipline, December 2009

Compensation Trends Improving, but Employees Won't Make Up Lost Ground Just Yet, SHRM Online Compensation Discipline, December 2009

Handling Bonus Season: Frustrated Employees, Nervous Managers, SHRM Online Compensation Discipline, December 2009

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