2018 Pay Forecasts: Flat Salary Increase Budgets Create Winners and Losers

Companies are using job promotions to raise pay

Stephen Miller, CEBS By Stephen Miller, CEBS October 17, 2017

As organizations continue to contend with the changing jobs landscape and falling unemployment, they're luring and keeping good workers by directing pay raises to star performers and using job promotions and nonmonetary benefits to keep in-demand workers engaged, recent research shows.

Rewarding High-Value Skills

Despite salary increase budgets remaining relatively unchanged at 2.8 percent in 2017 with projections rising slightly to 2.9 percent in 2018, according to HR consultancy Mercer's 2017/2018 U.S. Compensation Planning Survey, those with in-demand skills will see high pay raises next year. Jobs such as "social media communications professional" and "senior engineering technologist" are experiencing pay raises of 5.8 percent and 5.4 percent, respectively, according to Mercer's compensation database, which reflects pay practices for more than 16 million employees.

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"While companies are holding the line on increases to fixed compensation, they are getting much smarter about how they distribute those budgets, focusing on in-demand skills," said Mary Ann Sardone, Mercer's North America workforce rewards practice leader. "Jobs that represent critical skills aligned with company growth are being prioritized when it comes to pay."

Job Promotions Help Raise Pay

Because they have flat budgets but need to attract and retain critical talent, organizations often use promotions as a tool to advance employee pay. The typical promotional increase for professionals ranges from 7 percent to 12 percent, Mercer found.

Total increase budgets, which in addition to merit increases and cost-of-living adjustments also take into account pay increases following job promotions, rose 3.4 percent in 2017. This figure "reflects a more realistic picture of pay movement in organizations," Sardone said. "While it may not be the best approach to advancing pay, we know promotion is often used as the answer to common challenges of rewarding critical-skills workers, retaining top performers and motivating high-potential employees when the annual merit increase falls short."

Rewarding Top Performers

Differentiating salary increases by employee performance continues to be an approach that organizations use to deliver on a limited budget. According to Mercer's survey, the highest-performing employees are receiving base pay increases that are nearly twice that of average performers and four times that of the second-lowest performers.

"Bottom line, employees who perform below expectations can expect little increase in pay," Sardone said.

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Strengthening the Value Proposition

With limited budgets for pay adjustments, organizations are investing in a variety of practices to reward workers. "Programs that support career development and overall well-being are becoming popular as the labor market tightens," Sardone said. "Companies realize that competing on pay alone is an expensive proposition, so standing out in other areas is a cost-effective way to create an attractive employee value proposition."

[SHRM members-only guide: How to Establish Salary Ranges]

Wage Growth Outpaces Inflation

PayScale, a compensation data and software firm, recently released its Third Quarter (Q3) 2017 PayScale Index, which echoed Mercer's findings in showing a 2.8 percent year-over-year growth in U.S. wages. The findings draw on a database of over 35 million employee profiles.

In addition, year-over-year "real" (inflation-adjusted) wage growth was 1.1 percent, meaning that nominal wage growth outpaced inflation. But while the typical employee's earning power has increased, it has not yet caught up to levels before the 2007-09 recession, PayScale found.

"It's encouraging to see that wage growth has been consistently increasing for more than two years now with variability across regions and industries," said Katie Bardaro, vice president of data analytics and lead economist at PayScale. "While wages are on the uptick, real wage growth is still about 7 percent lower than pre-recession levels in 2006."

A forecast by the Hay Group division of Korn Ferry predicts for 2018 an average 3 percent pay increase in the United States. Adjusted for the expected 2 percent inflation rate that Hay Group foresees in 2018, the real wage increase will be 1 percent—down from this year's expectation of 1.9 percent. Canadian workers will see salaries increase by 2.6 percent, and with inflation at 1.7 percent, will experience real wage growth of 0.9 percent, Hay Group forecasts.

Regional Variations

Wage growth is strongest in Seattle, San Francisco and St. Louis, PayScale reported. 

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Differences by Industry

Retail workers saw 2.5 percent annual wage growth, just below the national average of 2.8 percent, PayScale found. The energy sector also lagged slightly, with 2.6 percent annual wage growth, while workers at finance companies outpaced other sectors with 3.6 percent annual wage growth.

"Wages for sales and science/biotech jobs continue to climb steadily, posting annual wage growth of 3.5 and 3.6 percent, respectively, well above the national average," Bardaro said.


Related SHRM Articles:

3% Salary Increases Put Greater Focus on Variable Pay, SHRM Online Compensation, August 2017

Employers Try Better Ways to Measure and Reward Performance, SHRM Online Compensation, August 2017

2018 Salary Increase Budgets Expected to Rise 3% in the U.S., SHRM Online Compensation, July 2017


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