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Consider business needs when undertaking salary-increase budgeting
Looking for 2017 salary forecasts? See the
SHRM Online article
Salary Budgets Expected to Rise 3% in 2017.
U.S. companies’ salary-increase budgets for 2016 are projected to increase by 2.7 percent, down from the 2.9 percent increase for 2015, according to
a preliminary forecast of global salary budgets by ERI Economic Research Institute, a provider of compensation data.
Salary-increase budgets typically include merit increases, although promotions may be budgeted for separately. Increasingly, employers are shifting toward
variable pay based on performance and away from cost of living raises—although pay ranges may be adjusted due to general industry pay trends, as positions become more or less in demand in the local labor market.
When developing a salary-increase budget, it’s valuable to consider not only the prior year's market movement of salaries, but also increases and decreases in the
consumer price index (CPI),
unemployment rates, and
gross domestic product, the report states. For instance, “Traditionally, a salary-increase budget would typically be 1-2 percent above the change in the country’s CPI. However, since salaries tend to respond more slowly to changes in the cost of living, salary-increase budgets may lag changes in CPI.”
As a best practice, the report recommends that salary-increase budget recommendations be reviewed twice a year—once early in the financial budgeting process around mid-year, and then later in the financial budgeting process for finalization and approval. “The second review is more extensive, since the majority of the global salary-increase budget surveys are available at that time, future economic projections are more clearly defined, and companies have a clearer position on the next year’s budgets and financials,” the report states.
U.S. employees can expect an average base salary increase of 3.1 percent in 2016 across most major employee categories, up only slightly, if at all, from the raises they received this year, according to WorldatWork survey results released on July 14, 2015. See the
SHRM Online article
Holding Steady, Expect Base Salary Increases of 3.1% in 2016.
Other Demands for the Money
In building a 2016 salary-increase budget, “it is important to assess the ability of a business to pay for the projected increases next year,” the report advises. “This will help determine if 2016 global salary-increase recommendations should be more liberal or conservative.”
For instance, compensation managers should consider other needs in the organization when undertaking salary-increase budgeting, including:
• What are the costs for any needed adjustments to minimum wage?
• What are the costs to bring employees up to salary-range minimums?
• Are there any mandated increases (e.g., contractual, unions, legal requirements, etc.)?
• Are there any special needs in the organization for market adjustments (e.g., departments, jobs, classifications, government requirements, etc.) that need to be implemented in 2016?
• Are there any new or revised compensation plans generating new expenses?
• Will any benefit costs impact the salary-increase budget in 2016?
• Will a promotional increase budget be implemented?
Budgeting for Promotions
Less than half of companies typically budget for promotions outside of the annual salary-increase budget, the ERI researchers found. “Companies that do not have a separate budget typically pay for promotions from employee turnover and savings gained from vacancies, downsizing and hiring new employees at lower salaries than the prior incumbents,” they noted. “When promotions are budgeted separately, 1 percent of total base salaries is commonly allocated for the promotional budget.”
Having ongoing, collaborative communications throughout the salary-increase budgeting process with key stakeholders can “foster buy-in and accountability, while eliminating the element of surprise,” the report notes.
As recommendations are being developed for the 2016 salary-increase percentages, “proactive communications with Finance on the budget is critical to ensure the recommendations are built into the financial budgeting assumptions. After the recommendations are finalized and necessary feedback and communications have taken place, recommendations can then be finalized for budget approval.”
Downward Pressures Curtail Bigger Paychecks
Since late 2009, average hourly earnings for private-sector jobs have grown about 2 percent annually, below the 3 percent rate that was typical before the Great Recession, according to the Bureau of Labor Statistics,
Kiplinger’s Personal Finance in its July 2015 issue.
Many expect the improving U.S. job market to result, at long last, in raising wages. But even though the unemployment rate has fallen to 5.4 percent, down from a peak of 10 percent shortly after the recession officially ended, millions of job seekers who dropped out of the workforce during the downturn remain on the sidelines, David Cooper, a senior economic analyst at the Economic Policy Institute, a Washington, D.C., think tank, told
Kiplinger’s. Consequently, “There’s just too much slack in the labor market to have meaningful wage increases.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Follow Me on Twitter.
Related SHRM Articles:
Holding Steady, Expect Base Salary Increases of 3.1% in 2016,
SHRM Online Compensation, July 2015
Base Salary Rise of 3% Forecast for 2015,
SHRM Online Compensation, July 2014
Variable Pay Spending Spikes to Record High,
SHRM Online Compensation, September 2014
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