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Variable Pay Spending Spikes to Record High
Overall, 2015 salary increase budgets hold steady at 3%

By Stephen Miller, CEBS  9/2/2014
 

Variable pay as a percent of payroll spending among U.S. employers hit a record high in 2014, new research by Aon Hewitt reveals. Conversely, salary increases for U.S. workers rose only slightly, reflecting companies’ continued focus on holding the line on fixed costs.

The consultancy's 2014 U.S. Salary Increase Survey of 1,064 companies looked at salary and variable pay increases for salaried exempt, salaried nonexempt, nonunion hourly and union workers. Among the findings:

91 percent of organizations currently offer a variable pay program and expect to spend 12.7 percent of payroll on variable pay for salaried exempt employees in 2015.

That's up significantly from 2005, when just 78 percent of companies offered a variable pay program, which accounted for 11.4 percent of payroll for salaried exempt workers.

“Variable pay budgets and spending have nearly doubled in the last 20 years, subsequently emerging as the pay-for-performance vehicle of choice now and for the foreseeable future,” said Ken Abosch, compensation, strategy and market development leader at Aon Hewitt. “In a more robust job market, competition for talent exists in every sector. As a result, we are seeing industries that have traditionally shied away from providing bonuses, such as agriculture, higher-education and the federal government, realizing they must establish variable pay programs to compete for and retain the best talent.” 

Spending on Variable Pay as a Percent of Payroll

 

2008

2009

2010

2011

2012

2013

2014

2015 (projected)

Salaried Exempt

10.8%

12.0%

11.3%

11.6%

12.0%

12.0%

12.7%

12.7%

Salaried Nonexempt

5.7%

6.5%

6.0%

6.3%

6.2%

6.0%

6.7%

6.8%

Nonunion Hourly

5.0%

5.8%

5.3%

5.2%

6.0%

5.4%

6.1%

5.9%

Union

5.9%

6.6%

4.6%

5.0%

4.9%

4.8%

5.6%

5.0%

Source: Aon Hewitt, 2014 U.S. Salary Increase Survey

 

“Historically unions have been resistant to performance-based reward approaches because they require management discretion,” said Abosch. “To see that variable pay spending on union employees is tracking with other hourly employees reflects a dramatic change in thinking in union leadership.”

Salary Increases

Salaried exempt workers are projected to see base pay rise 3.0 percent in 2015. This is a modest increase over last year, but marks the highest level since 2008, when salary increases reached 3.7 percent for salaried exempt employees.

The findings are in line with other recent 2015 salary budget projections: WorldatWork forecasts the average raise in 2015 base pay in the U.S. will be 3.1 percent, while Hay Group and The Conference Board forecast a median 3.0 percent base pay increase next year (see the SHRM Online article Base Salary Rise of 3% Forecast for 2015).

“Setting the right salaries to attract and retain top talent is among the most complex business decisions organizations face today,” said Abosch. “The majority of organizations have been conservative when evaluating salary increases. They feel like they need to be careful about adding to their fixed costs. This is one of the main reasons variable pay programs are so attractive—a one-time expense aspect of payouts that doesn’t carry over to the following year—as well as the fact that organizations only provide rewards if they have the performance to support it.” 

Annual U.S. Salary Increases

 

2008

2009

2010

2011

2012

2013

2014

2015 (projected)

Executive

3.9%

1.4%

2.4%

2.8%

2.9%

2.9%

3.0%

3.1%

Salaried Exempt

3.7%

1.8%

2.4%

2.7%

2.8%

2.9%

2.9%

3.0%

Salaried Nonexempt

3.7%

1.9%

2.4%

2.8%

2.7%

2.8%

2.9%

3.0%

Nonunion Hourly

3.6%

2.0%

2.4%

2.7%

2.7%

2.7%

2.8%

3.0%

Union

3.4%

2.2%

2.5%

2.6%

2.5%

2.6%

2.5%

2.8%

Source: Aon Hewitt, 2014 U.S. Salary Increase Survey

 

Salary Increases by City

Workers in some U.S. cities can expect to see salary increases higher than the national average in 2015, Aon Hewitt forecasts. These cities include:

Denver (3.5 percent).

Houston (3.4 percent).

Los Angeles (3.2 percent).

But workers in New York, Minneapolis/St. Paul and Milwaukee should anticipate pay increases of 2.8 percent, lower than the national average.

WorldatWork recently reported 2014 variances in average salary budget increase among major U.S. metropolitan areas (see the SHRM Online article Salary Budget Increases Broadly Consistent).

Salary Increases by Industry

Industries that can expect to see the highest salary increases in 2015 include:

Energy/oil/gas (3.8 percent).

Real estate (3.4 percent).

Telecommunications (3.2 percent).

Pharmaceutical (3.2 percent).

The lowest increases are projected to be in:

Education (2.7 percent).

Government (2.6 percent).

Forest and paper products/packaging (2.6 percent).

Further Consensus on 2015 Forecasts

As U.S. salary budget forecasts for 2015 continue to be rolled out by pay consultants and researchers, the findings confirm a broad consensus for average salary budget increases of 3 percent.

Below are results from Empsight International LLC's 2014 Policies, Practices and Merit Report, which includes 2015 merit forecasts. The survey of 272 mostly large U.S. companies was conducted from April through July 2014.

Forecasted Merit Increase Budget for 2015
(includes those planning zero increases)

 

Mean

P25

Median

P75

Overall

2.88%

2.80%

3.00%

3.00%

Executives

2.82%

2.80%

3.00%

3.00%

Management

2.86%

2.90%

3.00%

3.00%

Professionals

2.87%

2.90%

3.00%

3.00%

Support/Nonexempt

2.88%

2.80%

3.00%

3.00%

Source: Empsight International LLC

Terms:

Mean (average): The sum of all the rates reported divided by the number of organizations reporting data.

P25 (25th percentile): The rate within the sample that is higher than 25% of all the rates reported.

Median (50th percentile): The rate within the sample that is the middle value of all the rates reported.

P75 (75th percentile): The rate within the sample that is higher than 75% of all the rates reported.

 

Stephen MillerCEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Also see:

Pay Raises Spotlight Top Performers, SHRM Online Compensation, Aug. 2014

Salary Budget Increases Show Broad Consistency, SHRM Online Compensation, Aug. 2014

Base Salary Rise of 3% Forecast for 2015, SHRM Online Compensation, July. 2014 

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