Largest Merit Increases Since Start of Financial Crisis on Tap

Towers Watson foresees average merit pay boost of 3 percent at large and midsize U.S. firms

By Stephen Miller Feb 25, 2011

In 2011, U.S. employers are planning to give employees the largest merit increases since the start of the financial crisis, according to a survey by consultancy Towers Watson. In addition, the survey found that the hiring freezes that were put into place during the recession are beginning to thaw, especially for professional and technical workers and for positions that require critical skills.

The Towers Watson survey found that companies are optimistic and are budgeting merit increases of 3 percent for 2011. That compares with the 2.7 percent merit increase awarded to employees overall in 2010 and is the largest merit increase since before the financial crisis when increases typically averaged 3.5 to 4 percent.

The survey was conducted in late January and early February 2011 with large and midsize U.S. employers representing a broad range of industries.

Other Views

Using different methodologies, the Bureau of National Affairs' preliminary first-quarter Wage Trend Indicator pegged the 2011 rate of annual wage and salary growth for private-sector workers in the U.S. at close to 2 percent, while the consultancy Hay Group predicted median base salary increases for U.S. employees of 2.8 percent. The Duke University/CFO Magazine Global Business Outlook Survey found that U.S. CFOs expected wages in 2011 to rise 2.5 percent.

Though the overall economic horizon appears brighter, Towers Watson found that 5 percent of U.S. companies plan to freeze salaries for all workers in 2011, the same percentage as in 2010. However, 13 percent of companies plan to freeze salaries for executives, while 12 percent plan to freeze salaries for hourly workers. Both figures are down sharply from 2010.

More Pay for Performance

“Most companies have turned the corner and are now in a much stronger position financially to recognize and reward employees, especially their top performers,” said Laura Sejen, global head of rewards consulting at Towers Watson. “Throughout the recession and even afterwards, companies made it a high priority to provide better rewards to those employees who performed at the highest level and made the highest contributions to their organizations.”

According to the survey, companies provided the largest merit increases (4 percent) in 2010 to workers who "far exceeded" their performance expectations, while those who "exceeded" expectations received a 3.4 percent average increase. Conversely, workers who did not meet performance expectations typically did not receive an increase in 2010.

Hiring Freeze Begins to Thaw

The Towers Watson survey found that the hiring freezes that companies implemented during the recession are being lifted by companies that:

Plan to hire in 2011 for positions that require critical skills (42 percent of respondents).

• Plan to add professional and technical workers to their payrolls (40 percent).

• Plan to hire sales professionals and hourly workers (25 percent).

The survey reported that the attraction and retention challenges that employers are facing are confined to select employee groups—primarily critical-skill and top-performing employees. Companies reported:

• Problems attracting critical-skill workers (54 percent of respondents).

• Difficulty hiring top-performing employees (37 percent).

Moreover, about three in 10 companies report problems retaining critical-skill employees, while one in four have difficulty retaining top performers.

"As companies map out and implement their strategies to grow in a recovering economy, their ability to use not just pay but the full complement of other reward and talent management programs to attract, engage and retain the best possible talent will be critical to their success,” said Sejen.

Stephen Miller, CEBS,is an online editor/manager for SHRM.

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