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Annual Salary Percentage Increases
 

   1/1/2006
 

January’s human capital measure of the month, annual salary percentage increase, allows HR professionals to compare their annual salary percentage increases against similar organizations. An organization computes its average annual salary percentage increase by dividing the new total dollar increase in base salary compensation by the total dollars in base salary for those employees eligible for an increase. Organizations typically establish their annual salary percentage increases by taking into account a number of factors, such as cost of living increases and local employment and market conditions, and by reviewing industry compensation trends. Since annual salary percentage increases can amount to a significant financial expense, determining an organization’s annual salary percentage increase usually occurs during the budgeting process.

Table 1

Industry

Number of Respondents

25 th Percentile

Median

75 th Percentile

Total

1,624

3.0

3.5

4.0

Educational services

120

3.0

3.0

4.0

Financial services

123

3.0

4.0

4.3

Government

101

3.0

3.0

4.0

Health

152

3.0

3.3

 4.0

High-tech

119

3.0

4.0

5.0

Insurance

87

3.5

4.0

5.0

Manufacturing (durable goods)

194

3.0

3.0

3.5

Manufacturing (nondurable goods)

106

2.5

3.0

3.5

Publishing and broadcasting

16

3.0

3.3

3.5

Service (nonprofit)

132

3.0

3.0

4.0

Service (profit)

143

3.0

4.0

5.0

Transportation

18

2.5

3.0

3.5

Wholesale/retail trade

109

3.0

3.0

4.0

Nonprofits (all industries)

492

3.0

3.5

4.0

Source: Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary . Alexandria, VA: Society for Human Resource Management.

Money talks, and base salary compensation is an important recruitment and retention tool. In fact, both topics were considered the top challenges by more than 36% of HR professionals surveyed in 2005. 1 By comparing one organization’s base salary, bonus compensation and company benefits against similar organizations, HR professionals are able to devise competitive total rewards programs that retain and attract key talent. With 2005 inflation rate anticipated to be 3.1% or higher 2 and the median expected annual salary percentage increase at 3.5%, 3 it is critical for HR professionals to view compensation, along with HR strategies and practices surrounding it, as a strategic organizational tool that can help drive and sustain employee performance. For example, as the burden of rising health care costs is being passed on to employees, budgeting salary increases at levels below inflation will generally have a significant negative effect that will cause employees to have less purchasing power than the year before. In addition, when annual salary percentage increases do not differentiate between high and low performance, there becomes less reward for top performers. This will potentially lower total productivity because top performers, who perceive no benefit in working hard, will leave to join others organizations that reward employee efforts and results. When top performers leave and low performers stay, the organization keeps a greater percentage of lower performing employees. Over time the makeup of employees then consists of those who produce less, achieve less and whose human capital subsequently starts weakening the firm’s ability to successfully compete in the market. 4 Therefore, the importance of a well thought-out compensation and reward system is critical for companies that want to attract and retain high-performing human capital.

Table 2

Company Size

Number of Respondents

25 th Percentile

Median

75 th Percentile

Small (50 or fewer FTEs)

264

3.0

4.0

5.0

Medium (51 to 1000 FTEs)

1,024

3.0

3.2

4.0

Large (more than 1000 FTEs)

290

3.0

3.3

4.0

Source: Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary . Alexandria, VA: Society for Human Resource Management.

The 2005 SHRM Human Capital Benchmarking Study found several interesting details regarding expected salary increases for 2005. Although there are minor differences in annual salary percentage increases in Table 1, the variations are not significant and reflect differences between organizations, not industries as a whole. 5 In addition, Tables 2 and 3 indicate that smaller organizations expected higher salary increases for 2005 compared with larger organizations. This may have occurred because larger companies usually have more extensive compensation, rewards and benefits programs outside of base pay. These may include annual bonuses, high-demand skill pay, retention bonuses, pay-for-performance plans and other compensation programs that can be used to attract and retain talent. This often allows larger organizations to compete in the market without solely relying on offering higher base salaries. 6

Table 3

Revenue Amount

Number of Respondents

25 th Percentile

Median

75 th Percentile

Low (less than $3.5M)

157

3.0

3.5

5.0

Moderate ($3.5M to $100M)

617

3.0

3.1

4.0

High (more than $100M)

265

3.0

3.5

4.0

Source: Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary . Alexandria, VA: Society for Human Resource Management.

Knowing the expected salary increases among peer organizations is important in order to maintain the organization’s competitive edge. Many other human capital metrics exist in addition to annual salary percentage increase, and they are often most useful when considered together. For more information on human capital metrics and to learn how the SHRM Customized Human Capital Benchmarking Service can take your HR department to the next level, please visit our Web site at www.shrm.org/Research/CustomizedBenchmarkingService/Pages/default.aspxor call 1-800-283-7476 ext. 6366.

Endnotes

1 Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary . Alexandria, VA: Society for Human Resource Management.

2 IOMA. (July 2005 ). Report on salary surveys. New York: Author.

3 Dooney, J., & Smith, N. (2005). SHRM benchmarking study: 2005 executive summary . Alexandria, VA: Society for Human Resource Management.

4 Wells, S. (May 2005). No results, no raise. HR Magazine, 50, 5, 76-80.

5 Dooney, J., & Smith, N. (2005). SHRM benchmarking study [Unpublished results].

6 Ibid. 

Author:  Noël Smith, SHRM Research Department

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