Compensation Trends Improving, but Employees Won't Make Up Lost Ground Just Yet

Companies focus on pay differentiation strategies targeted at retaining critical talent

By Stephen Miller Dec 16, 2009

Salaries will be on the rise in 2010 at many companies across the U.S., according to research from consultancy Towers Perrin. This is a significant shift from the lockdown many organizations placed on compensation budgets during 2009. In fact, 65 percent of companies that froze salary budgets in 2009 will unfreeze them in 2010. Yet most companies report continued uncertainty and lack of confidence in the near term and are therefore limiting annual merit increases.

Just one-third of those surveyed anticipate significant improvement in business conditions for their industry or organization by the close of 2010's second quarter. As a result, the median salary increase for employees, excluding those who received no increase, will be only about 3 percent in 2010—an increase relative to 2009 at many companies but down from the nearly 4 percent median increase seen in the pre-recession days of 2007. Simultaneously, in 2010, companies plan to put more emphasis on differentiating the pay increases they do grant as part of their strategy to retain key talent.

"Companies are making an effort to gradually return some sense of normalcy to compensation budgets in the coming year," says Ravin Jesuthasan, Towers Perrin managing principal. "But in the current environment, 'normal' is a relative concept. Employees coming off a year with no salary increases or bonuses will likely appreciate a small bump in compensation, even if it is noticeably off from pre-recession norms."

In 2009, companies made a number of cuts to employee compensation programs in an effort to reduce expenses and avoid layoffs. In total:

43 percent of companies polled froze salary budgets for 2009.

25 percent cut back on employer 401(k) contributions.

17 percent reduced hours worked for some or all employees.

For 2010, the plan is to slowly reverse these strategic cuts as businesses take thoughtful actions to balance the competing needs of cost reduction and talent management. In 2010:

Just 17 percent of companies polled plan to have a salary freeze in place.

7 percent will reinstate salaries across the board.

401(k) Match Is Back

Employee 401(k) plans should see modest improvements in 2010. Of all companies polled:

10 percent plan to increase employer 401(k) contributions in 2010.

Among those companies that cut back on the 401(k) match in 2009, 35 percent are planning to increase their 401(k) contributions in 2010.

Global Compensation

Companies in many countries share the U.S. group’s conservative outlook on 2010, with projected median salary increases around 3 percent or less. On the opposite end of the spectrum, employers in the BRIC countries (Brazil, Russia, India and China) and certain high-inflation economies are projecting faster salary growth, with expected 2010 salary increases of 7 percent or higher, according to Towers Perrin’s 2009-2010 Global Compensation Planning Survey conducted in summer 2009.

Retention in the Recovery

Despite the projected compensation increases, companies appear to be growing concerned about retaining their high-performing top employees and those in pivotal roles once hiring picks up. According to the Towers Perrin research, 70 percent of companies are very or somewhat concerned about losing key talent as a result of the cutbacks made during the recession. And this talent flight concern is likely warranted, as many companies indicated they plan to increase hiring in 2010 and will almost certainly look at competing organizations in their industry or region as a possible source of talent.

Specifically, of the companies surveyed:

Only a third plan to freeze or reduce hiring in 2010 (down from 65 percent in 2009).

A full 21 percent of companies polled plan to increase hiring.

"Leaders understand there may be repercussions to the deep cuts required by the recession," says Jesuthasan. "Organizations that plan to recover quickly can’t sit back and watch top talent walk out the door. Companies that use differentiated compensation strategies as a means of retention and recognition are realizing real returns—and we see more organizations considering this strategy for 2010."

Paying for Performance

Differentiating pay and other compensation programs allows managers to adjust annual salary increases or bonuses to match an employee's performance or value to the organization's long-term needs. In 2010:

48 percent of companies indicated they will continue with the same differentiation strategies they used in 2009 for their 2010 salary review process.

An additional 40 percent will differentiate more than in prior years.

The vast majority (93 percent) will be looking specifically at individual performance as the basis for differentiated pay increases.

More specifically, 2010 will see an increase in the use of all forms of compensation to keep top talent:

49 percent of employers plan to use straight salary increases as a retention tool in the recovery.

32 percent plan to issue cash retention awards.

26 percent will likely issue stock retention awards, and 25 percent will use higher bonus payouts.

Bonuses Decline

Despite employer efforts to restore some of the compensation withheld during the recession, it could take employees years to make up for recession-driven losses to their salary and other compensation elements.

"The average employee is being hit on multiple fronts," says Jesuthasan. "Many workers lost out on a 2009 merit increase and saw their 401(k) match reduced or eliminated. In 2010, that match may return in some form—but merit increases will be low and provide a percentage bump on a smaller base than would have been the case had salaries not been frozen the prior year."

In addition, bonuses are down for the second consecutive year at many companies, with almost half of those organizations polled planning to pay lower or no bonuses for 2009 performance:

36 percent of companies expect 2009 bonuses for management-level employees to be down.

Another 11 percent plan to pay no bonuses at all to this group.

Other exempt employees fared similarly, with 47 percent of companies reducing or eliminating their bonus payouts.

The survey results indicate senior executives will also see declines in salary and bonuses for the second straight year:

While only 12 percent of companies plan to freeze salaries for all employee groups in 2010, 23 percent of those surveyed plan to freeze salaries for senior executives in 2010.

The median annual salary increase for executives will be 2.5 percent, compared to 2.9 percent at the organization overall.

Executive bonuses will also be down slightly more than those for employees, with 49 percent of senior executives receiving reduced or no bonus in 2010 for 2009 performance (compared to 48 percent or less for employees).

Remixing Long-Term Incentives

In addition, many companies have yet to make decisions about the size of 2010 long-term incentive (LTI) grants, given the continuing uncertainty. That said, virtually all organizations surveyed have or plan to make some adjustments to their overall LTI programs. Among those making changes in 2010:

48 percent will change the LTI vehicle mix.

44 percent will change the threshold, target or maximum payout level.

41 percent will add performance measures.

Towers Perrin’s most recent compensation research was conducted in late October 2009. In total, 333 compensation professionals and HR executives provided information on their U.S. operations.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Handling Bonus Season: Frustrated Employees, Nervous Managers, SHRM Online Compensation Discipline, December 2009

2010 Compensation Budgets Dip Slightly from Projections, SHRM Online Compensation Discipline, November 2009

Compensation 2010: Answers to Tough Planning QuestionsSHRM Online Compensation Discipline, September 2009

Quick Links:

SHRM Online Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

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