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Employers are approaching salary increases in a cautious manner, with emphasis on engaging and retaining top talent as the economy improves
U.S. employers plan to adjust their compensation practices for 2011 in response to concern over losing top talent after a year of pay freezes and, for some, signs of economic recovery. According to Mercer’s 2010/2011 U.S. Compensation Planning Survey, more than 98 percent of U.S. companies plan to award base pay increases in 2011. Moreover, just 2 percent of companies are planning across-the-board salary freezes in 2011, compared with 13 percent in 2010 and 31 percent in 2009.
Of the employers projecting to grant base pay increases, the average increase is expected to be 2.9 percent in 2011, up from an actual 2.7 percent in 2010 but still down from 2009 levels (3.2 percent). Unlike past years, expected salary increase levels for 2011 are even across most employee groups. However, more employers are taking a segmented approach to salary increase allocations and continuing to focus on high-performing talent.
Average U.S. Base Pay Increases by Employee Group
2010 Salary Increases
Projected 2011 Increases
% firms freezing salaries
Average raises (excluding 0s*)
Average raises (including 0s)
Professional (sales and
*0s reference the 0% salary increases planned or made by some employers.
Mercer’s survey included responses from more than 1,100 mid-size and large employers across the U.S. and reflects pay practices for more than 12 million workers. The survey results are captured for five employee categories: executive, management, professional (sales and non-sales), office/clerical/technician, and trades/production/service.
“It looks like salary raises are back, and for good reason,” said Catherine Hartmann, a principal with Mercer’s rewards consulting business. “The risk of losing key employees is top of mind as the economy recovers and certain labor markets improve. And while non-monetary awards such as career development and training are effective in retaining employees, employers realize that top-performing employees are loath to go another year without an increase in pay. Investments in both cash and non-cash solutions will have a significant impact on avoiding post-recessionary flight.”
As organizations struggle to balance rewards programs and limited budgets with the need to engage and retain talent, they are continuing to segment their workforce and rewards based on performance. As a result, the gap between high-performing employees and those in the lower-performing categories is widening significantly. According to Mercer’s survey:
“In the tug of war between limited resources and the need to retain critical employees, recognizing top performance is still clearly a driving factor,” Hartmann said. “Differentiating salary increases among employee groups is a necessity, allowing employers to make their investments in those employees that will advance the organization in the new economy.”
Despite salary increases being lower than in recent years, variations exist among industry sectors. Compared with the expected average pay increase of 2.9 percent in 2011, organizations within high-performing industries plan to grant higher increases. The oil and gas industry is among the highest with projected average pay increases of 3.5 percent, followed by the business/professional services industry at 3.2 percent. In contrast, other industries expect to award less in 2011, including education at 2.6 percent and real estate at 2.5 percent.
Average base pay increases by select industry*
base pay increases
Projected 2011 base pay increases
Oil and gas
*These figures do not include the 0% salary increases planned or made by some employers.
“Despite budgetary constraints among all sectors, more stable growth industries are planning to provide raises for select employees,” Hartmann said. “In general, increasing pay will continue to be a challenging priority for employers until improved economic conditions are evident and the economic outlook significantly improves.”
Mercer's survey shows that short-term incentive payouts in 2010 increased slightly over projections made in November 2009. Overall, average payouts as a percentage of base pay for all employee groups were expected to remain stable.
Median U.S. Short-Term Incentive Payouts (as a percentage of base pay)
(as of November 2009)
(based on 2009 performance)
Professional (sales and non-sales)
However, a separate survey of U.S. companies by consultancy Towers Watson indicates that employees can expect to receive larger annual bonuses as organizations return to profitability. Towers Watson found that companies’ average projected bonus funding for 2010 performance is 92 percent of target, representing an increase of 12 percent over the prior performance year. Bonus pool funding levels have dropped steadily over the past few years. The last time most companies were able to fully fund annual bonuses was 2007, according to the firm.
“Funding for annual bonuses is generally driven by corporate profits or other financial performance measures such as increased revenues. With many companies reporting stronger profits and higher revenues this year, companies will have more resources available to fund bonuses and potentially reward employees with larger bonuses than they have received in the past few years,” said Laura Sejen, global rewards practice leader at Towers Watson.
Globally, Pay Increases Show Wide Variation
Driven by variances in the economic recovery worldwide, there are significant differences in 2010 merit increase budgets by region, according to a survey by consultancy Towers Watson. For example, employees who met expectations in China and India received an average base pay increase of 8.8 percent, while organizations in Ireland and Spain provided employees who met expectations with an average merit increase of 1.6 percent.
In addition, the degree to which companies differentiate increases based on performance varies significantly. While they have the lowest merit budgets, organizations in Ireland and Spain report the greatest levels of merit differentiation. Companies in these countries report a more than 300 percent differentiation between increases for employees who far exceed expectations (top performers) and those who meet expectations (average performers). Differentiation across other regions ranges from 200 percent to 260 percent.
Although there are signs of increased organizational profitability, companies outside the United States and Canada appear to be cautious in their annual bonus pool funding and are keeping their projected funding levels similar to those of 2009. Interestingly, the survey found that companies that have outperformed their peers are reducing their expected payouts this year relative to their target payouts, while those that have performed poorly in the past are increasing their payouts.
“High-performing companies are more likely to significantly raise their performance targets, while firms that have performed poorly are likely to lower them. As a result, achieving the same absolute performance level from one year to the next will lower the payouts at high-performing firms and increase the payouts at poorly performing firms,” said Laurie Bienstock, North America rewards practice leader at Towers Watson.
The Towers Watson Global Talent Management and Rewards Survey was conducted in May and June of 2010 and includes responses from 1,176 companies globally, including 314 from the United States.
Stephen Milleris an online editor/manager for SHRM.
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