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Limited pay raises reflect modest economic growth, despite a tighter job market
Updated on Sept. 28, 2016.
Based on preliminary salary budget projections for 2017, organizations in the U.S. are planning to boost pay by around 3 percent on average—as they did in 2016.
In July, WorldatWork, an association of total rewards professionals, released
top-level results from its 2016-2017 Salary Budget Survey, which received a total of 5,759 responses from among the group's members, who were asked how much they are planning on increasing base pay throughout their organizations in the upcoming year.
In the table below, the "mean" is the mathematical average while the "median" is the middle value after listing reported budget increases 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
Source: WorldatWork 2016-2017 Salary Budget Survey, preliminary findings. Survey data collected through May 2016.
Aggregated across all Canadian employee categories, regions and industries, the average total salary budget increase is 2.6 percent in 2016, a reduction from the 2.8 percent budgeted in 2015 and short of the 2.9 projected for this year, WorldatWork reports.
Among other recent pay forecasts for the coming year:
Other recent salary budget forecasts for 2017 have been issued by compensation consultancy
Korn Ferry Hay Group (citing a 3 percent median pay increase), consultancy
Willis Towers Watson (3 percent average salary increases for management and nonexempt employees, while executives can expect 3.1 percent), pay consultancy
Empsight (median merit increase budgets of 3 percent across all categories, and 2.8 percent at the 25th percentile) and pay survey data provider
BLR (finding 2.5 to 3 percent across all employee types).
These forecasts reflect the amount employers expect to be able to increase base pay throughout the organization. Individual salary raises are often based on
job performance evaluations, while salary ranges for job positons may be adjusted based on
job market factors.
"The 3 percent median pay increase number doesn't necessarily mean that all employees should expect to receive this number, said Chicago-based Tom McMullen, Hay Group's North American total rewards expertise leader, who noted "a reasonable spread of practices across organizations" in findings from Hay Group's U.S PayNet database, with responses from more than 850 U.S. organizations received from March through June 2016.
"Organizations at the 90th percentile consistently indicate a 3.5 percent increase budget across all employee groups, while the 10th percentile is showing 2 percent across all groups," McMullen said. "We typically see top performers in organizations receiving between 1.5X and 2X the median salary increase for employees, So top performing individuals could expect to receive salary increases upwards of 6 to 8 percent."
Conflicting Economic Indicators
There is evidence of a tightening labor market in the U.S., which typically pushes wages higher. As reported by the U.S. Bureau of Labor Statistics (BLS), since the end of the Great Recession in June 2009 the U.S. unemployment rate has fallen from a high of 9.5 percent
to 4.9 percent, as of June 2016.
the government recently reported, U.S. economic growth was only 0.8 percent (revised) in the first quarter of 2016 and 1.2 percent in the second—a slower pace than many economists had expected.
"The economy is only growing annually at 2 percent, so even though unemployment is getting better it's hard to raise prices right now" to produce the increased revenue that could fund higher wages across the board, said Craig Rowley, a Dallas-based senior client partner with Korn Ferry Hay Group.
As to the apparent contradiction of tepid economic growth and a tightening labor market, "keep in mind that part of the drop in the unemployment levels is people dropping out of the labor force," Rowley pointed out. "The participation rate has been at
a record low."
Another reason for salary increase stagnation: Given the conflicting signs of how strong the U.S. economy is, employers are opting to remain cautious with their pay-budget forecasts, compensation specialists say.
"Despite positive pressures from decreased unemployment and an increase in job openings, … salary budgets continue to be restrained by ongoing uncertainty in the global economy and low rates of inflation," said Kerry Chou, senior practice leader in compensation at Scottsdale, Ariz.-based WorldatWork. "Organizations are still planning and awarding salary increases but the amount of the increases remains flat and is not changing year over year." In the U.S. in particular, with low inflation, "the demand for larger salary increases just isn’t there and low unemployment has not been enough to motivate organizations to increase salary budgets," Chou said, noting that labor market pressures would likely need to come from multiple directions to accelerate wage growth.
"While it is true that the U.S. job market has improved over the past couple of years, it is also true that companies continue to operate in a highly uncertain international environment and with a strong dollar that restrains exporting opportunities," added Matteo Tonello, managing director of corporate leadership at The Conference Board in New York City. "Domestically, they realize that they may be in the tail end of a 6- or 7-year expansionary phase. Whether or not the prediction of an impending recession turns out to be accurate, controlling fixed costs such as salaries becomes an imperative in such an uncertain marketplace."
Jonas Johnson, senior researcher at Irvine, Calif.-based ERI Economic Research Institute, noted that "right now, folks are reporting lower expected salary increases in 2017 than when they reported expected 2016 increases in 2015" a year ago, based on anticipation that the economy would grow at a faster clip in the latter half of last year.
Johnson said that ERI's compensation budgets report, referenced above, used data from Oct. 1, 2015 through May 31, 2016. He has subsequently analyzed survey responses from Jan. 1 through July 22 that suggests slightly lower 2017 salary budget projections for general employees (2.7 percent) and professionals/executives (2.9 percent), with the caveat that "what folks say they will do and what actually happens" often differs, based on the changing economic outlook.
If economic growth actually does pick up later this year, higher salary budget expectations—followed by higher actual pay increases—may finally follow. Likewise, if the economy stalls and heads into recession, employers would be likely to limit pay increases for next year.
Salary Range Adjustments
With regard to salary ranges, WorldatWork reported average upward salary structure adjustments of 1.9 percent (2.0 percent median) in 2016, which is anticipated for 2017 to average 2.1 percent (2.0 percent median).
Lump-sum base pay awards—an increase in pay made in the form of a single cash payment when, for instance, an employee is at the maximum of his or her salary range—were made by 60 percent of companies for exempt salaried positions in 2016, with an average of 13 percent of all exempt salaried employees receiving lump-sum base pay awards instead of a pay raise.
Shift to Variable Pay
Tonello pointed to another factor restraining salary budgets. "Companies have chosen to shift from the fixed costs of salary raises to rewarding employees through annual bonuses and other performance-based compensation."
Variable pay vehicles such as annual or quarterly bonuses based on individual, team and organizational goal achievement "offer more flexibility and do not commit cash resources in advance and for the long term," Tonello said. "They can be tailored to year-end performance and cash availability, and significantly reduced in the following year if softening performance requires it."
Despite the mixed economic outlook, "We're seeing there is a willingness to provide compensation upside through short and long-term incentive plans and financial recognition programs," said Hay Group's McMullen. "Organizations are willing to provide handsome cash payments using these programs if they get the corresponding performance from the organization and its employees."
Willis Towers Watson's survey found that exempt employees are projected to receive annual performance bonuses that average 11.6 percent of salary in 2017, roughly the same amount companies budgeted for this year.
Discretionary or incidental bonuses, generally paid for special projects or one-time achievements, for exempt employees are projected to average 5.6 percent of salary, slightly more than the 5.3 percent average bonus awarded in 2015.
"Incentives tied to individual and company performance continue to play a greater role in an employee's total rewards package," said Sandra McLellan, North America practice leader for rewards at Willis Towers Watson.
At SHRM's 2016 Annual Conference & Exposition, held in June, variable pay advocate John A. Rubino
explained why he is on "a worldwide crusade to abolish merit-based salary" raises, which often fail to differentiate top performers from average employees. He argued that base pay should reflect each position's market value, while individual performance should be rewarded through lump-sum variable compensation. This results in "employees who are focused on adding value to the business by meeting and exceeding performance expectations," he said.
In the U.S., the percentage of organizations using variable pay marginally rose to 84 percent in 2016, WorldatWork reported in its complete
2016-2017 Salary Budget Survey. This number had been hovering around 80 percent for many years. A combination of awards based on both organization/unit success and individual performance continues to be the most prevalent type of variable pay program.
Regional Differences Greater for Variable Pay
Workers in most U.S. cities and across all industries can expect to see salary increases in line with the national average for 2017, according to Aon Hewitt. But workers in some U.S. cities are expected to see higher-than-average variable pay in 2017. These cities include Houston (21.1 percent), New York City (15.1 percent), Minneapolis/St. Paul (14.9 percent) and Chicago (13.7 percent).
"Variable pay budgets vary by city year over year and depend heavily on the performance of the specific industries that are located within the city as well as the local economic conditions," explained Ken Abosch, broad-based compensation leader at Aon Hewitt. "For example, the energy sector dominates Houston, which was hit with rocky financial performance this year. In 2017, Houston is expected to have the lowest base salary pay increases but the highest variable pay levels in the U.S., which allows these organizations to keep employees engaged and rewarded."
Financial Reward Opportunities
With continuing modest base pay increases likely for next year, employers should think about ways to differentiate themselves from competitors and appeal to job candidates. In addition to variable pay bonus programs that reward achievement, employers shouldn't discount career training and advancement opportunities. Getting promoted, after all, is still one of the best ways for employees to grow their paycheck.
Promotional increases were awarded to 8.0 percent (median: 7.0 percent) of employees in 2015, one-tenth of a percentage point greater than the 7.9 percent (median: 7.0 percent) average in 2014, WorldatWork found.
Of the promotional increases received, the size of the average pay increase remained unchanged at 8.4 percent (median: 8.0 percent). The planned amount that organizations spend on promotional increases in 2016 also had no change, at 1.5 percent (median: 1.0 percent) of total base salaries.
"Challenging business conditions and strong global competition this year means many companies are holding the line on compensation spending in the year ahead," said Abosch. "However, as the job market continues to improve, stagnant compensation spending could leave many companies in a difficult position in the war for top talent. Organizations may need to either re-think their compensation strategy, or emphasize the other benefits and perks they provide as a way to attract and retain the best workers."
Related SHRM Article:
Bonus Binge: Variable Pay Outpaces Salary,
SHRM Online Compensation, August 2016
Incidental Bonuses and Alternative Rewards Are on the Rise,
SHRM Online Compensation, July 2016
Related SHRM Resource:
For a round-up of salary budget forecasts, visit SHRM's
Salary Increase Projections 2017 Express Request.
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