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Employers continue to strengthen the relationship between pay and performance, focus on engagement
As the economy slowly improves, pay raises will follow—and more so for top performers—as organizations struggle to balance relatively stable compensation planning budgets with retention of critical talent.
According to Mercer’s 2011/2012 U.S. Compensation Planning Survey report, 97 percent of U.S. organizations are planning to award base pay increases in 2012. Mercer expects the average increase in base pay for U.S. workers to be 3 percent in 2012, up slightly from 2.9 percent in 2011 and 2.7 percent in 2010.
Half of the organizations that project higher 2012 pay increases than those granted in 2011 cited expected labor shortages and greater competition for workers as the main reasons.
The survey includes responses from more than 1,200 mid-size and large employers across the U.S. and reflects pay practices for more than 12 million workers.
Table 1. Average Base Pay Increases by Employee Group
Averages increases, excluding/including organizations that gave no base pay increases in 2011 or expect to give no increases in 2012.
Projected 2012 Increases
Professional (sales and nonsales)
Source: Mercer, 2011/2012 U.S. Compensation Planning Survey report.
“The risk of losing key employees weighs heavily on employers as their compensation budgets remain flat,” said Catherine Hartmann, a principal with Mercer’s rewards consulting business. “Employers realize that in order to hang on to their best employees, they’re going to have to reward them. And while noncash rewards, such as training and new opportunities, enhance retention, base pay is still the most important element of the employment deal.”
As organizations struggle with balancing limited budgets and the need to retain critical talent, they are segmenting their workforce and concentrating rewards on key and top employees. As a result, the gap between high-performing employees and those in the lower-performing categories is widening significantly.
Mercer’s survey shows the highest-performing employees (8 percent of the workforce) received average base pay increases of 4.4 percent in 2011 compared with 2.8 percent for average performers (54 percent of the workforce) and 0.4 percent for the weakest performers (2 percent of the workforce).
Table 2. Pay Increases as a Function of Performance
Percent of Workforce
Average Pay Increase
“The continuing fragile economy has caused employers to remain worried about increasing compensation; however, they are more worried about losing their best employees to their competitors,” Hartmann said. “Differentiating salary increases based on performance has become a necessity with limited resources. In this less-than-robust environment, top-performing employees are an employers’ competitive weapon, and they are doing their best to reward them accordingly.”
As employers segment their workforce and grant pay increases based on performance, they are investing more time reviewing the relationship between employee performance and pay and being more specific about engaging employees.
According to Mercer’s 2011 Next Generation of Pay for Performance Survey report, more than two-thirds (69 percent) of employers in the U.S. are working to increase differentiation of pay based on performance. Additionally, the survey shows that organizations’ primary objectives for focusing on pay for performance are to attract and retain top talent, drive specific behaviors or results, and encourage engagement.
Table 3. Primary Pay-for-Performance Plan Objectives
Attract, retain or reward talented employees
Drive specific behaviors or results
Encourage employee engagement
Motivate employees to work harder
Best way to allocate limited funds
Desire to encourage synergies across teams and business units
Penalize low performers
Protect company if it doesn't do well financially
Source: Mercer, 2011 Next Generation of Pay for Performance Survey report.
“Distinguishing pay based on performance is an effective way for employers to assess workforce needs and invest in those employees that will advance the organization,” Hartmann noted. “And by doing so, they’re establishing higher expectations for top performance—essentially, a new standard for their employees.”
Yet organizations must tread carefully. Mercer’s research shows overall scores are down consistently across employee engagement measures, including a strong sense of commitment to the organization and willingness to go beyond job requirements to help the organization succeed, while intention to leave is up.
“Employers clearly face significant challenges with raising engagement levels,” Hartmann said, “and they’re going to have to look to incentives beyond pay to keep employees onboard and motivated.”
Other Pay Raise Forecasts: A 3 Percent Consensus
In July 2011, pay consultancy Hay Group reported that U.S. employees can expect median pay increases of 3 percent in 2012, consistent with salary increases for 2011 but below the 4 percent increases seen from 2005 to 2008 (see "Forecasted 2012 U.S. Base Salary Increases Remain Steady"). WorldatWork, an association of total rewards professionals, projects that salary budgets will rise by 2.9 percent in 2012 and that, based on individual performance ratings at year-end 2011:
(See "More Employees to Get Raises as Pay Freeze Thaws").
The Duke University/CFO Magazine Global Business Outlook Survey results project that U.S. wages will rise by 3 percent over the next year (see "Moderate Economic Growth, Slow Job Market, Say CFOs").
SHRM members can receive links to online articles about 2012 surveys as well as information on survey participation opportunities by visiting SHRM's Hot Topics Express Request web page and selecting the key term Salary Increase Projections under "Compensation."
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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