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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
Surveyreport.
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.
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.
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).
“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.
“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, non-management 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.
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