2018 Salary Forecast: Smaller Real Wage Increases in the U.S. and Globally

Asia sees highest real wage growth, though at slower pace than last year

Stephen Miller, CEBS By Stephen Miller, CEBS January 4, 2018
2018 Salary Forecast: Smaller Real Wage Increases in the U.S. and Globally

A December forecast by the Hay Group division of consultancy Korn Ferry reveals that, adjusted for inflation, employees in North America and around the world are expected to see a smaller rise in their take-home pay in 2018, and pay consultants warn this may lead to lower engagement and productivity.

"With inflation rising in most parts of the world, we're seeing a cut in real wage increases across the globe," said Bob Wesselkamper, Korn Ferry global head of rewards and benefits solutions. "On average, employees are not seeing the same real pay growth they did even one year ago."

North America Lagging

In the United States, an average 3 percent pay increase is predicted by Korn Ferry, the same as for 2017. Adjusted for the expected 2 percent inflation rate in 2018, however, the real wage increase is 1 percent—down from last year's 1.9 percent.

Canadian workers will see salaries increase by 2.6 percent, and with inflation at 1.7 percent, they'll experience real wage growth of 0.9 percent, according to Korn Ferry's forecast.

These findings mirror those of other pay researchers. Last July, WorldatWork, an association of total rewards professionals, released salary budget survey results with actual 2017 and projected 2018 salary budget increases for planned cost-of-living adjustments and merit increases. The actual 2017 median salary budget increase and the projected 2018 median increase in the U.S. and Canada were pegged at 3 percent, based on 4,942 employer responses received midyear.

"Companies are budgeting conservatively," said Kerry Chou, CCP, senior practice leader, WorldatWork. In the U.S., factors that might explain the plateau in growth include the increased use of variable pay, Chou said.

Similarly, HR consultancy Mercer's U.S. compensation planning survey found salary increase budgets in the U.S remaining relatively unchanged at 2.8 percent in 2017 with projections rising slightly to 2.9 percent in 2018. However, 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.

"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."

In December, New York City-based compensation firm Empsight shared results from its Spot Survey of 2018 Merit Forecasts & Practices. The report summarizes data collected from 107 large Fortune 500 and multinational companies from November to December 2017, and shows that for 2018:

  • Salary structures are forecast to increase by 2.37 percent on average (2 percent median) for organizations that are budgeting for an increase or making salary structure changes.
  • Merit pay is forecast to increase by 2.89 percent on average (3 percent median) for those budgeting for a merit pay increase.
  • Executives had the highest average 2018 merit forecast (3.03 percent) as compared to 2.90 percent for support/nonexempt employees.

The average is the sum of the responses divided by the total number of responses, and is affected more by the occurrence of outliers (extreme values on either the high or low end) than is the median or middle value.

"Only 1 percent of companies forecasted a zero increase as compared to 3.9 percent last year, which suggests a more optimist trend," Empsight's report said.

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

Creating a Strong Employee Value Proposition

"Employees are clearly demonstrating complacency in their careers—they aren't looking for new opportunities, but they also aren't going out of their way to work hard in their current roles," said Brian Kropp, HR practice leader at consultancy CEB/Gartner. "Part of this complacency is being driven by employees' expectations for minimal annual compensation increases and bonus pay, which is leading to lower productivity and engagement levels," he said.

To counter this situation, "leaders need to think about how to incentivize employees to remain motivated. Without additional compensation and other key rewards, workers' desires to go above and beyond in their jobs will remain limited," Kropp noted. Employers should "devote time and energy to develop a comprehensive employment value proposition that best positions their organization as a top employer of choice," he advised.

Global Trends

The Korn Ferry report showed expectations for salary increases worldwide, as noted below. The data were drawn from the firm's database of more than 20 million job holders in 25,000 organizations across more than 110 countries. The U.S. database represents compensation practices for more than 2,200 companies and more than 4.3 million employees.

• Australasia sees the lowest real salary increase.
Wages in Australasia are forecast to grow by 2.5 percent, which is an increase of 0.7 percent in real wages when adjusted for inflation. Australia will see a 2.5 percent top-line growth, a 2.1 percent inflation rate, and a 0.4 percent real wage increase. In New Zealand, a 2.5 percent salary increase is forecast, with 1.5 percent inflation, for a 1 percent real salary increase.

• Eastern Europe faring better than Western Europe.
According to the Korn Ferry forecast, workers in Western Europe are expected to see lower wage increases compared with 2017, with an average increase of 2.3 percent, and inflation-adjusted real wage increases of 0.9 percent.

Employees in Eastern Europe are set to see an average salary increase of 6 percent in 2018. However, after taking inflation into account, real wages will only rise by 1.4 percent, which is down from 2.1 percent in 2017.

With the continued uncertainty following the Brexit decision, wages in the United Kingdom are up just 2 percent. Combined with a 2.5 percent inflation rate, real wages are expected to decrease by 0.5 percent.

• Highest real wage growth in Asia.
In Asia, salaries are forecast to increase by 5.4 percent—down from 6.1 percent last year. Inflation-adjusted real wage increases are expected to be 2.8 percent—the highest globally, but down from 4.3 percent last year.

China remained consistent year over year with real wage increases predicted at 4.2 percent for 2018, compared to 4 percent last year.

• Latin America sees second-highest real wage growth.
Employees in Latin America are expected to see a 6.2 percent increase in wages, and with inflation slowing down in the region, real wage increases will reach 2.1 percent, up from last year's 1.1 percent.

"Slower economic growth in mature economies keeps a check on pay raises," said Wesselkamper. "In emerging economies, upskilling workers is crucial for companies to maintain a competitive advantage—and those skilled employees can expect to see wages rise as talent shortages in certain regions drive salaries upward."

Related SHRM Articles:

2018 Pay Forecasts: Flat Salary Increase Budgets Create Winners and Losers, SHRM Online Compensation, October 2017

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

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

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