3% Salary Increases Put Greater Focus on Variable Pay

Restrained pay raises likely to continue next year

By Stephen Miller, CEBS Aug 7, 2017
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With salary increase budgets expected to remain at 3 percent for both 2017 and 2018, employers are continuing to leverage variable pay to differentiate rewards for high-performers.

"With a tight job market and reported financial gains, we might have expected to see more growth in salaries," said Kerry Chou, WorldatWork senior practice leader. "In the United States in particular, there are factors that might explain this plateau in growth, including the increased use of variable pay or noncash-based rewards."

Variable Pay

As companies hold down base pay increases to maintain a handle on fixed costs, "employees are still seeing increases in pay through improved variable pay plan payouts," Chou said.

The percentage of organizations using variable pay vehicles—such as annual or quarterly bonuses based on individual, team and organizational goal achievement—rose 1 percentage point for the third straight year, to 85 percent in 2017, according to research from WorldatWork, an organization of total rewards professionals, in its new 2017-2018 Salary Budget Survey report.

Variable Pay Programs (U.S.)

Variable pay awards, representing a percentage of base pay, are differentiated by employee classifications. Results are shown for the median* percentage.

 

Nonexempt Hourly Nonunion

Nonexempt Salaried

Exempt Salaried

Officers/ Executives

Average percent paid, 2016

5.0%

5.0%

11.0%

34.0%

Projected percent paid, 2017

5.0%

5.0%

12.0%

35.0%

Source: WorldatWork.

*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 less effect on the median than on the mean, which is the mathematical average.



The report reflects the results of a survey of WorldatWork members, most of whom work at large companies. Survey data was collected from March 27 through May 5 and included 1,819 respondents from U.S. organizations with at least 10 employees. "Top level" results from the survey were released last month.

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

Merit Salary Increase Awards

Base salary increases are being awarded to 89 percent of employees in 2017, on average. For high-performers, the anticipated 2017 median merit increase award remains at 4.0 percent, the same as last year. 

2017 Merit Increase Awarded by Performance Category

Results are shown for the median percentage. 

 

High Performers

Middle Performers

Low
Performers

Percentage of employees estimated to be rated in this category

22%

70%

5%

Average merit increase estimated for this performance category

4.0%

3.0%

0.0%

Source: WorldatWork.

Minor Regional Differences

As in recent years, a comparison of salary budget increases among employers in different states for 2017 showed little variance. The average (mean) increases ranged slightly from 2.9 percent to 3.1 percent, with the median at 3.0 percent for every state.

Metropolitan areas showed a bit more average salary budget variance this year, ranging from 3.0 percent to 3.3 percent.

"The metropolitan areas that show the highest percentages, such as the Pacific Northwest, Los Angeles, Dallas or Atlanta, tend to be in regions of the U.S. that are driven by high-tech or minimum-wage increases," Chou noted.

No city came in below the 3 percent number. The highest average salary budget increases this year were in:

  • Atlanta: 3.3 percent.
  • Dallas: 3.2 percent.
  • Los Angeles: 3.2 percent.
  • Portland, Ore.: 3.3 percent.
  • San Francisco: 3.2 percent.
  • San Jose, Calif. 3.2 percent.
  • Seattle: 3.2 percent.

These findings also may in part reflect local and state government increases to minimum-wage rates, Chou said.

Another View of Merit Pay

Separately, New York City-based compensation firm Empsight shared preliminary results from its 2017 Policies Practices and Merit Report during a webcast at the end of July. The findings are based on mostly multinational and Fortune 500 companies in the firm's client database (70 percent with revenues above $5 billion).

The firm provided this comparison of merit increase budgets for 2017 and 2018.

Merit Increase Budget for 2017

Employee Category

Mean

25th Percentile

Median

75th Percentile

Executive

2.79%

2.50%

3.00%

3.00%

Management

2.76%

2.50%

3.00%

3.00%

Professional

2.77%

2.50%

3.00%

3.00%

Support/Nonexempt

2.78%

2.50%

3.00%

3.00%

Source: Empsight.

-----

Merit Increase Budget for 2018

Employee Category

Mean

25th Percentile

Median

75th Percentile

Executive

2.81%

2.50%

3.00%

3.00%

Management

2.82%

2.50%

3.00%

3.00%

Professional

2.82%

2.70%

3.00%

3.00%

Support/Nonexempt

2.82%

2.70%

3.00%

3.00%

Source: Empsight.


"Overall, merit budgets remained the same from 2016 levels across all industries," said Susan Bell, principal consultant at Empsight. While slightly higher budgets were found in the professional service, pharmaceutical, energy and consumer product sectors, "overall, merit budgets remained the same from 2016 levels across all industries," she said.

"The forecast appears slightly higher in 2018 merit projections versus 2017, but not by much," she noted. "Expectations are that spending will remain the same."

Total compensation increase budgets, which include merit increases, promotions and special adjustments, ranged between one-quarter to one-third percent on top of merit increases, Empsight found.

Total Compensation Budget Forecast for 2018

Employee Category

Mean

25th Percentile

Median

75th Percentile

Executive

3.22%

3.00%

3.00%

3.50%

Management

3.23%

3.00%

3.00%

3.50%

Professional

3.23%

3.00%

3.00%

3.50%

Support/Nonexempt

3.24%

3.00%

3.00%

3.50%

Source: Empsight.


"The 2018 forecast expects about the same spending across job levels, which is up only slightly from 2017," she noted. Overall total compensation budget increases are forecast to increase 3.25 percent (mean) and 3.00 percent (median) for 2018, compared with 3.21 percent (mean) and 3.00 percent (median) for 2017.

"Companies tend to target the median of the marketplace for both base and total cash compensation," added Jeremy Feinstein, Empsight managing director.

"For almost the last eight years, it's been a 3-percent merit world," limiting employers' ability to use pay to foster employee retention, he noted.


Star Performers Reap Rewards

Despite U.S. employers holding the line on base pay raises in 2018, employers continue to find ways to reward their best performers, a new survey by consultancy Willis Towers Watson shows, revealing a consensus with other recent pay forecasts.

The survey of a cross-section of 819 companies, conducted between April and July 2017, found that:

  • Virtually all respondents (99 percent) are planning to give employees raises in 2018.

  • For exempt, nonmanagement employees, salaries are expected to increase 3 percent on average—the same increase they received in each of the past three years.

  • For management and nonexempt employees, employers are also planning 3 percent average salary increases.

  • Executives can expect slightly larger base pay raises—3.1 percent in 2018, which is, however, slightly less than executives received this year and in 2016.

"Most companies are not under any significant pressure to increase their salary budgets in the near term," said Laura Sejen, managing director for human capital and benefits at Willis Towers Watson. "Companies are relying more on variable pay, such as annual incentives and discretionary bonuses, to recognize and reward their best performers. At the same time, they are rewarding star performers with significantly larger increases while granting minimal increases to their weakest performers."

The survey, for instance, showed that:

  • Exempt employees who received the highest performance ratings were granted an average salary increase of 4.5 percent this year.

  • Employees receiving an average rating received salary increases of 2.6 percent.

  • Workers with below-average performance ratings received salary increases of 1.0 percent.


Variable Pay Trends

Annual performance bonuses, generally tied to company and employee performance goals, are projected to hold steady in 2018 for most employee groups:

  • Exempt employees are projected to receive bonuses that average 10.5 percent of salary, roughly the same amount companies budgeted for this year.

  • Discretionary bonuses, generally paid for special projects or one-time achievements, are projected to hold relatively steady compared with bonuses awarded last year and budgeted for this year.

"Employers are rethinking how to administer limited salary budgets," said Sandra McLellan, rewards practice leader, North America, at Willis Towers Watson. "Some organizations are moving away from differentiating increases based on an employee's previous year's performance altogether while others are focusing on rewarding employees for skills development."


Related SHRM Articles:

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

2018 Salary Increase Budgets Expected to Rise 3% in the U.S., SHRM Online Compensation, July 2017

More Competition for Talent Is Leading to Rise in Wages, SHRM Online Talent Acquisition, July 2017

Evolving Company Culture from Base Pay to Variable Rewards, SHRM Online Compensation, June 2017

 

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