Unemployment flattens pay raises; top performers reap higher rewards

More hiring has yet to lead to more pay. While U.S. unemployment fell from 10% in October 2009 to 8.3% in August 2012, it has not been enough to boost salary budget increases and, subsequently, employee wages, according to WorldatWork, an association of total rewards professionals.

Pay increase budgets at U.S. employers have picked up slightly from all-time lows in 2009, going from an average (mean) of 2.2% to 2.8% in 2012, according to the 39th annual WorldatWork 2012-2013 Salary Budget Survey. But the movement does not appear to be coming from organizations awarding larger pay increases. Instead, it stems from fewer organizations reporting 0% increases, or frozen salary budgets. The number of 0% responses declined from 33% of employers in 2009 to just 5% in 2012.

“There is an inverse relationship between the spike in organizations budgeting 0% and the overall average salary budget increase,” explained Alison Avalos, a certified compensation professional and research manager for WorldatWork, in a press statement. “When pay budget freezes spiked in 2009, overall mean and median salary budget increases plummeted, pulled down by the zero values. The overall average salary budget seems to be holding steady at close to 3%, but the growth is not because employers are being aggressive with salary increase budgets. It is mostly because the number of 0% responses has declined in the three years since the recession.”

WorldatWork collected survey data in April 2012 from among its members, who are employed in the HR, compensation and benefits departments of mostly large U.S. companies. All data include 0% responses.

Major metropolitan compensation data

Employers in Detroit reported the lowest overall average salary increase budget at 2.6% for 2012, while Houston-area employers reported the highest, topping 3%. Most metropolitan areas reported average salary budget increases ranging from 2.7% to 2.9% for 2012, and 2.9% to 3.1% for 2013.

Compensation data by industry

Pay increase budgets for public administration hit an all-time low of 1.3% in 2010 and 2011, but rose to 1.7% in 2012. Conversely, the mining industry was far above national figures, with average 2012 salary budget increases at 4%.

Variable or incentive pay

The percentage of organizations using variable pay grew to 82% in 2012, up from 79% in 2011. A combination of awards based on organization/unit success and individual performance continues to be the most prevalent type of variable pay program.

Rewarding top performers

WorldatWork’s findings were supported by Mercer, which found 95% of U.S. organizations were planning to award base salary increases in 2013. Mercer’s 2012/2013 U.S. Compensation Planning Survey includes responses from more than 1,500 midsize and large employers across the U.S. and reflects pay practices for more than 12 million workers. Similar to WorldatWork’s findings, the average raise in base pay for workers in the U.S. is expected to be 2.9% in 2013, up slightly from 2.7% in 2012 and 2011, and 2.3% in 2010, Mercer found, a finding in line with a recent forecast by Hay Group, a pay consultancy.

Mercer noted that companies plan bigger increases for top-performing employees -- 8% of the workforce -- as they strive to balance compensation planning budgets with retention of critical talent.

The survey shows the highest-performing employees received average base pay increases of 4.4% in 2012 compared with 2.4% for average performers (54% of the work force) and 0.1% for the weakest performers (2% of the work force).

“As employers strive to balance the need to retain key talent with their financial budgets, they are segmenting their workforce and focusing on identifying and recognizing high-potential employees,” said Catherine Hartmann, principal with Mercer’s rewards consulting business, in a press statement.

“Differentiating salary increases based on performance is the norm and remains an effective way for employers to wisely spend their reward dollars on the most impactful employees,” said Mike Burniston, leader of Mercer's human capital consulting business for the United States and Canada, in a press statement. “Since many companies are still working with limited dollars, taking a holistic approach to total rewards using internal workforce analytics as well as external market data to set appropriate programs for each employee segment is the smart approach.” 

Factors influencing pay decisions

According to the survey, the top three factors influencing compensation decisions are:

• Retaining talent (reported by 74% of respondents);

• Strengthening a performance-based culture and delivering pay for performance (66%); and

• Acquiring talent (57%).

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