2019 Salary Budgets Inch Upward Ever So Slightly

2019 Salary Budgets Inch Upward Ever So Slightly

Wage growth stays restrained despite low unemployment and tight labor market

Stephen Miller, CEBS By Stephen Miller, CEBS July 16, 2018
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updated on Aug. 16, 2018

Salary-increase budgets for U.S. employers next year are projected to grow by just 0.1 percent above the actual average budget increase for 2018, confirming that wage growth remains surprisingly stagnant despite record low unemployment.

U.S. salary budgets are projected to rise by an average of 3.2 percent in 2019, up from an actual year-over-year increase of 3.1 percent for 2018, according to the WorldatWork 2018-2019 Salary Budget Survey: Top-Level Results, released on July 10. 

"Expectations for growth in U.S. salary budget increases have been mounting for many months," said Alison Avalos, research director at WorldatWork, an association of total rewards professionals. "However, despite significant tax-reform changes and a tight labor market, the one-tenth of a percentage point movement isn't the growth that was anticipated. This year's survey data gives us little reason to think that U.S. organizations intend to significantly invest more dollars into salary increases for 2019."

On a brighter note for workers, 2018 was the first time in four years that the U.S. national salary budget increase average was higher than 3 percent and also the first time over that period when the actual salary increase met the previous year's projection.

The median figures show that most organizations will award at least some base salary increase—e.g., general increase/cost-of-living adjustment (COLA), merit increase—to nearly all employees.

In the table below, the mean is the mathematical average while the median is the middle value after listing reported budget increase expectations in successive order. Outliers, or extreme values on either the high or low end, have the biggest effect on the mean and less effect on the median.


Total U.S. Salary Budget Increases by Employee Category

Employee Category
Actual 2018
Mean
Actual 2018 Median Projected 2019 Mean Projected 2019 Median
Nonexempt hourly nonunion
3.1%3.0%3.1%3.0%
Nonexempt salaried3.1%
3.0%3.1%3.0%
Exempt salaried3.1%3.0%3.2%3.0%
Officers/executives3.0%3.0%3.2%3.0%
All 3.1% 3.0% 3.2% 3.0%
Source: WorldatWork 2018-2019 Salary Budget Survey: Top-Level Results. Survey data collected through May 2018 with 2,031 U.S. responses including companies making no salary adjustments.


Similarly, a July 2018 report by The Conference Board, a business membership and research association, projected 2019 total median increase in U.S. salary budgets across all employee categories and industries would remain at 3 percent overall.

"We aren’t seeing extreme increases in salary budgets like some experts had anticipated, but we are seeing growth," Avalos said. "Organizations know they need to offer competitive pay to attract and retain top talent but pay isn’t the differentiator that it once was. Staying competitive with pay increases will likely continue, but we don’t anticipate dramatic increases despite the tight labor market and changes to the tax code."

The complete WorldatWork 2018-2019 Salary Budget Survey, released for sale at the end of July, showed that fewer than 5 percent of U.S. organizations plan to pass tax savings on to employees via salary increases. Instead of investing primarily in significant pay increases, "organizations continue to think more holistically about total rewards offerings and the overall employee experience," Avalos said. "There are robust rewards programs that zero in on uniquely relevant needs for organizations. We anticipate the combination of competitive pay coupled with tailored rewards, including advancement opportunities, to be where organizations invest their resources."

In Canada, the average actual 2018 salary budget increase was 2.9 percent (mean) and 3 percent (median), WorldatWork reported. For 2019, Canadian employers project a salary budget increase of 3 percent (mean and median).

Merit-Based Differences

While salary budget increases represent additional funds that employers plan to spend on employee base salaries, they don't necessarily represent the average salary increase that workers will receive. Raises above the projections would likely go to top performers and those with in-demand skills.

For instance, WorldatWork's survey showed that merit-based pay increases for 2018 are expected to average:

  • 2.8 percent for middle performers (69 percent of workers).
  • 4.1 percent for high performers (25 percent of workers).
  • 0.6 percent for low performance (6 percent of workers). 

Organizations continue to leverage variable pay and other awards programs to differentiate rewards for high performers as well.

New findings from consultancy Willis Towers Watson show that nonexempt salaried employees with the highest possible rating average salary increases of 4.6 percent while those with average ratings average increases of 2.7 percent. 

The firm's 2018 General Industry Salary Budget Survey - U.S. was conducted in late April through early July, with responses from 814 companies representing a cross section of industries.

Pay raise bar chart.jpg

Minor Regional Differences

As in recent years, a comparison of salary budget increases among employers in different states and localities for 2018 showed little variance, WorldatWork found. The average (mean) increases for all states this year was either 2.9 percent or 3 percent, except for California, where the average salary budget increase was 3.1 percent.

The only major metropolitan area to registered below the 3 percent national average for salary budget growth this year was Detroit, where salary budgets grew by 2.9 percent. In terms of cities, the highest average salary budget increases were on the West coast, with 3.3 percent growth in San Francisco, San Jose and Seattle—all cities driven by high-tech and minimum-wage increases.

Separately, New York City-based compensation firm Empsight posted its downloadable Policies Practices & Merit Survey Report in August. The findings are based on mostly multinational and Fortune 500 companies in the firm's client database (73 percent with revenues above $5 billion). The firm provided this comparison of 2019 forecasts for total compensation budgets and merit increase budgets.

________________________________________

2019 Total Compensation Budget Forecast

Participating companies were asked to provide the forecasted total percentage salary increase budget (merit/promotional/special competitive adjustment) for 2019. The survey responses from 156 companies are summarized below. The median values across all levels was 3 percent.

Employee Category Mean 25th Percentile Median 75th Percentile
Executive3.14%3.00%3.00%3.28%
Management3.20%3.00%3.00%3.50%
Professional3.21%3.00%3.00%3.50%
Support/Nonexempt3.20%3.00%3.00%3.30%

Source: Empsight, Policies, Practices & Merit Survey Report. Responses including companies making no salary adjustments.

"Similar to last year, the bulk of salary budgets were planned for merit, or for merit and promotion combined into a single budget," the Empsight report states.

________________________________________

2019 Merit Increase Budget Forecast

Employee Category Mean 25th Percentile Median 75th Percentile
Executive2.83%2.60%3.00%3.00%
Management2.89%2.78%3.00%3.00%
Professional2.88%2.79%3.00%3.00%
Support/Nonexempt2.87%2.75%3.00%3.00%

Source: Empsight, Policies, Practices & Merit Survey Report. Responses including companies making no salary adjustments.

"Some organizations said they have created additional, supplementary base and/or spot bonus budgets specifically designated to reward and retain high performers," according to Empsight. "This suggests organizations are experiencing and are gearing up for a competitive employment environment, as some respondents indicated that instead of establishing additional special high-performer budgets, they are changing timing to administer rewards to their top performers early, which has the impact of accelerating pay for top talent."

Mercer's 2018/2019 US Compensation Planning Survey, with responses from more than 1,500 mid-size and large employers across the U.S., similarly forecasts that merit salary increase budgets (average for all non-union employees) will be 2.9 percent in 2019, after remaining steady at 2.8 percent for 2018.

With unemployment falling, "companies are still not investing in base salary, even though it's the reward employees value the most," said Mary Ann Sardone, partner and Mercer's North America Rewards practice leader. "By continuing to hold the line on salary increase budgets, they risk losing their top performers to competitors," many of whom are offering a premium for new hires.

(Update)


Wage Growth at Smaller Business

Wages and salaries in the U.S. were up 2.8 percent overall and 2.9 percent for private industry in the 12 months through June, the biggest annual gain since the third quarter of 2008, while benefits costs also increased 2.9 year over year, the Department of Labor (DOL) reported on July 31. The DOL's quarterly employment cost index includes part-time workers.

And yet, "despite the tightening labor market conditions, we're seeing only modest levels of wage growth" among small U.S. businesses, said Martin Mucci, president and CEO of Paychex, a payroll technology firm. "With the unemployment rate at historic lows, we'd expect to see accelerating wages in this type of employment market."

The Paychex Small Business Employment Watch for June showed that the pace of annual growth for hourly earnings among the firm's approximately 350,000 small-business clients fell to 2.47 percent—the first time since early 2016 that wage growth has been below 2.5 percent.

However, there were regional differences. At 3.2 percent, hourly earnings growth in the West outpaced the rest of the country, with growth rates in the Midwest and South more than a full percentage point behind.

Pay increases for salaried workers at small businesses have outpaced wage growth figures that include hourly and part-time workers.

WorldatWork's findings found that especially when based on the number of employees rather than revenue, salary budget increases were larger for smaller organizations, which include professional services firms. For 2019, mean salary increase budgets based on number of employees are projected to range from 3.4 percent (1 to 499 employees) to 3.0 percent (10,000 or more employees), while median increases are expected to hold steady at 3 percent across organization size. 

"Very small businesses may outsource all but the most core work," so that they "tend to be some of the highest-paying. That can reflect very small, highly skilled workforces, or larger ones with unionized workers or risky jobs," the Wall Street Journal recently reported.

[SHRM members-only HR Q&A: How can I locate resources for salary survey data for all industries and occupations?]


Wage Growth at Large Private Firms

Consultancy PwC's newly released Q2 2018 Trendsetter Barometer Survey showed that big privately held companies expect hourly wages for current workers to rise an average of 3.6 percent over the coming year, which is higher than the 3.46 percent that these companies expected when polled in the first quarter. PwC's results reflect the views of 300 CEOs/CFOs interviewed between April 2 and June 29, representing U.S. privately held firms with average annual revenues of $367 million.

"Large private companies view the lack of qualified workers as a barrier to growth more now than any other point over nearly 20 years," said Ken Esch, private company services partner at PwC. "Also, private companies often view employees like 'family' and don't have to manage Wall Street expectations for profit. They can reinvest in the workforce and share more profit with employees."

In the corporate world, however, higher pay may be seen as an expense to be avoided rather than as an investment in people. 

"Benefits of recent changes to tax policy are largely reaped by business owners, not employees. Many corporations are using the additional money to buy back stock rather than increase wages," said Katie Bardara, vice president of data analytics and chief economist at PayScale, a provider of on-demand compensation data and software.

Another factor is that employers are opting for variable compensation such as bonuses instead of increasing salaries or hourly wages, because variable compensation is not a permanent adjustment and doesn't compound over time, she said.


Inflation Ate My Raise

PayScale's Q2 Wage Index report, released in July, found that due to the rapid rise of the consumer price index (CPI), workers—including hourly and part-time employees—earned 1.4 percent less in real (inflation-adjusted) wages than they did one year ago. PayScale's findings draw from its data on more than 35 million employee profiles.

Bardara noted the exceptions to minimal raises that others pointed out. "We are seeing higher wage growth for certain jobs as the tightening of the labor market continues and demand for certain talent outpaces supply," she said. "Our current strong economy disproportionately benefits employees that are in demand, in addition to shareholders and executives, while the average worker is left behind."

Inflation could consume a larger share of workers' wages going forward. The CPI's cumulative growth in June from a year earlier hit 2.9 percent, the highest level since February 2012, the Department of Labor said on July 12. 

"For the second month in a row, annual inflation fully offset workers' average hourly wage growth in June, leaving real hourly earnings flat from a year earlier, despite falling unemployment and a generally strong economy, The Wall Street Journal reported.

ERI Economic Research Institute, a compensation analytics firm, earlier this year posted a commentary with a decade-by-decade look at real salary increases in the U.S., showing the percentage of salary increase budgets less the percentage change in the CPI through 2016:

Decade Average Real Salary Increase
1980s2.12%
1990s1.47%
2000s1.22%
2010s1.16%

Source: ERI Economic Research Institute.

"During 2017, the real wage increase reduced even further to 1 percent. In 2018, wage growth is projected to drop to 0.7 percent assuming budgets remain stable at 3 percent," wrote Linda Cox, global total rewards expert at ERI.

Going forward, The Conference Board's July 2018 report projected both the 2018 and 2019 inflation rates to be 2.4 percent.

Job Switchers Reap Rewards

The second-quarter 2018 Workforce Vitality Report from ADP, which measures the total wages paid to the U.S. private-sector workforce along with hours worked, employment growth and job turnover, also found wage growth rising to 3 percent year-over-year.

ADP graph-crop.jpg

Source: ADP, 2nd Quarter 2018 Workforce Vitality Report.

In addition, the data showed an increase in wage growth for job switchers:

  • Job switchers in professional and business services and construction realized high wage growth of 9.1 and 7.1 percent, respectively.
  • In trade, transportation and utilities, the largest sector, job switchers saw wage growth of 3.4 percent.
Year over Year Wage Growth (June 2018)

Industry Sector All Wage Growth Job Switchers' Wage Growth Employment Growth
Information5.5%
9.4%1.7%
Construction2,0%7.1%3.4%
Trade, transportation and utilities
3.1%3.4%0.9%
Manufacturing2.7%4.9%1.5%
Finance and real estate
2.5%9.4%1.5%
Education and health services2.9%1.2%2.2%
Professional and business services
3.4%9.1%1.2%
Source: ADP, 2nd Quarter 2018 Workforce Vitality Report.

"We're seeing interesting shifts in labor-market dynamics this quarter," said Ahu Yildirmaz, co-head of the ADP Research Institute. "Job switchers who are 55 and older are seeing wage growth of 6.3 percent, which is 1.5 percent higher than the prime workforce group who are 35-54. This shift suggests employers are searching far-and-wide for skilled talent and workers who were once sitting on the sidelines have begun to return to the labor market in response."

Promotions and Pay Increases

More employees are being promoted, WorldatWork found: 8.6 percent in 2017 compared to 7.9 percent in 2016, and the raises associated with those promotions are higher. The size of the average promotional pay increase rose to 8.7 percent, up 0.3 percentage points.

While budgeting and funding practices vary for promotions, the increased promotional activity may indicate that employers are responding to greater worker desires for career progression and the need to backfill Baby Boomer retirements, WorldatWork reported.

Mercer's survey showed that about half of organizations budget separately for promotional increases with an average promotional salary budget of 1.2 percent of payroll and an average promotion salary increase as a percentage of base pay at 7.8 percent—but rising to between 8 and 9 percent for management and executives.

Mercer-promotional-increases-2.jpg

Source: Mercer 2018/2019 U.S. Compensation Planning Survey.

Salary Structure Adjustments

An organization's salary structure is a hierarchy of pay ranges with established minimums, midpoints and maximums. In 2018, the reported overall average salary structure adjustment is 2 percent, WorldatWork reported, representing no change from 2017.

For 2019, the projected average adjustment is 2.1 percent overall but 2.2 percent for exempt salaried and officers/executives.


Lump-Sum Awards Instead of a Raise

Organizations often give employees, in certain situations, an annual lump-sum award instead of a salary increase, WorldatWork's survey showed. 

Lump-sum awards in the form of a single cash payment are often used when employees have exceeded the maximum of their salary range, or when an employer does not want to increase an employee's base pay due to budget constraints.

Lump Sum Awards

Employee Category
Percent of Companies Giving Lump-Sum Awards
Nonexempt hourly nonunion55%
Nonexempt salaried
55%
Exempt salaried
60%
Officers/executives44%

Source: WorldatWork 2018-2019 Salary Budget Survey.

Variable Pay

​The percentage of organizations using vari­able pay remained steady at 85 percent in 2018 and more than 80 percent of employees earned variable pay in 2017, WorldatWork noted. A combination of awards based on both organi­zation/unit success and individual performance continues to be the most prevalent type of variable pay program.

For more on variable pay trends, see the SHRM Online article Despite Low Unemployment, Employers Don’t Plan to Boost Bonus Budgets.

Employers Beware

Slow or even nonexistent (after inflation) base-pay raises could mean higher turnover rates are ahead. A 2018 survey by specialty recruitment firms Accounting Principals and Ajilon explored workers' attitudes toward leaving or staying at a job and found:

  • Compensation ranked as the most important factor that employees consider when deciding to accept a job offer.
  • 43.2 percent of workers would be enticed to leave their company if another one offered a better salary or other pay.
  • More than a quarter of employees (25.7 percent) are actively seeking new job opportunities and over half (55.5 percent) are passively open to new job opportunities.

The survey of 1,004 U.S. full-time employees in sales, office and management/professional occupations was conducted from April 24 to May 8.

"The cultural norm for an acceptable length of time to stay at a company has shifted," said David Alexander, president of Accounting Principals and Ajilon. "This means employers need to continually evaluate whether they're fostering an environment that retains top performers." 

Along with compensation perceived to be fair, employers can provide opportunities for career development through training, new assignments and more-appealing job titles, and engage employees around the organization's mission.

Related SHRM Articles:

Despite Low Unemployment, Employers Don’t Plan to Boost Bonus Budgets, SHRM Online Compensation, August 2018

Where's the Wage Growth?, SHRM Online Compensation, June 2018

Related SHRM Resources:

Express Request: Salary Increase Projections 2019

SHRM Compensation Data Center

Pay Forecast Reports to View/Download:

Empsight: Policies Practices & Merit Survey Report (free, registration required)

Mercer: 2018/2019 U.S. Compensation Planning Survey (executive summary)

Willis Towers Watson: 2018 General Industry Salary Budget Survey - U.S.

WorldatWork: 2018-2019 Salary Budget Survey: Top-Level Results

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