Flat Salary Increase Budgets Spur Promotions for Pay Raises

Performance-based bonuses and career advancement are ways to earn more

By Stephen Miller, CEBS November 19, 2015

Although the economy is improving and the job market is more robust, salary increase budgets for U.S. companies continue to show few signs of growth. That’s causing greater reliance on tying base pay increases to stellar performance, as well as turning to other reward methods—such as performance-related bonuses and career-advancement tracks that allow employees to increase base pay by getting promoted.

According to Mercer’s 2015/2016 U.S. Compensation Planning Survey, the average salary increase budget is expected to be 2.9 percent in 2016, up slightly from the average increase budget of 2.8 percent in 2015.

The survey includes responses from 1,504 midsize and large employers across the U.S. and reflects pay practices for more than 17 million employees.

Five-year trend of average base pay increases

Averages include employees who received no pay increase.

Source: Mercer

Performance-Based Pay

As organizations look for enhanced ways to pay for performance, differentiating salary increases by employee performance continues to be the norm. Companies are rewarding top-performing employees with significantly larger increases than those in the lower-performing categories, Sardone said.

Mercer’s survey shows that:

The highest-performing employees received average base pay increases of 4.8 percent in 2015 compared to 2.7 percent for average performers and 0.2 percent for the lowest performers, and this pattern is expected to continue in 2016.

Salary increases for top-performing employees—7 percent of the workforce in 2015 and projected to be 8 percent of the workforce next year—will substantially outpace that of average performers, as companies continue to differentiate salary increases based on performance.

Average 2015 base pay increases and projected 2016 increases

by performance rating

Based on companies with a 5-point rating scale. Averages include employees who received no pay increase.

Source: Mercer

For Higher Pay, Get Promoted

“Employers are finding ways to deliver pay increases through other means like promotions, which reflects the growing trend of focusing on careers and sustained performance, not a one-year snapshot and reward,” said Mary Ann Sardone, a partner in Mercer’s talent practice based in the Atlanta area.

Promotional increases, which on average included approximately an 8 percent rise in pay this year, vary by job category but consistently rose for all groups:

For executives, promotional increases rose to 9.1 percent of base salary, up from 8.4 percent last year.

For professionals, promotional increases rose to 7.7 percent, up from 6.9 percent last year.

41 percent of organizations are now budgeting promotional increases separately from merit increases, up from 36 percent last year.

Five-year trend of promotional increases as a percent of base pay

Averages include employees who received no pay increase.

Source: Mercer

“As a supplement to rather low pay raises, we’re seeing a steady rise in the use of short-term incentives to reward performance,” commented Sardone. “Flat budgets have also created more reliance on other reward methods like developing career opportunities and creating meaningful work experiences that align with the company’s goals and support employees’ needs.”

To ensure employee engagement and better manage talent programs, companies are adopting career frameworks—a set of guidelines that shows employees how they can move between jobs within the organization. According to Mercer's survey, 40 percent of organizations currently have a career framework and 30 percent of those that do not are planning to implement one.

Increasingly, “the goal of the annual merit increase is to keep people within market range on their base pay. It isn't a method to reward people,” Eileen Adler, chief HR officer at PeopleFluent, a business software provider based near Boston, recently told SHRM Online. “Bonuses and other forms of variable, performance-based pay, career development and meaningful work have become a larger part of the value proposition,” she noted.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.​


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