Modest Pay Increases Expected for 2011 as Economy Tries to Recover (10/10)

The latest Hewitt salary survey information reports that 2011 will be a slightly better year for most employees, though increases still will likely stay below 3%.

Salary increase projections from Hewitt Associates show that employers remain cautious, but appear more optimistic for 2011.  The Hewitt Associates 2010-2011 U.S. Salary Increase Survey predicts that the rate of salary growth for 2011, on average, will remain just below 3%, somewhat better than the anemic 2.4% reported for most employees in 2010.  Hewitt, a global human resources consulting firm, surveyed 1,450 large employers nationwide and found that the actual base salary increase rates will range from 2.8 to 2.9% for most employees.  In addition, the survey indicates that the use of performance-based variable pay as a primary means to reward employees remained steady, used by 89% of surveyed employers. 2010 Was Better than the Dismal 2009 Hewitt’s latest survey reports that 2010 was definitely a better year for employees’ salaries than 2009.  Employers surveyed in 2010 indicated that their 2009 increases were the lowest in the 34 years the survey has been conducted.  Hewitt’s 2008-2009 survey had predicted fairly robust increases of between 3.7% and 3.9%, but it was conducted just before the bottom fell out of the stock market and the collapse of several banks and other financial firms in the fall of 2008.  In response to these events, actual 2009 increases were pulled back to a meager 1.4% for executives, 1.8% for salaried exempts, 1.9% for salaried nonexempts, and 2.0% for nonunion hourly employees.       Actual increases for 2010 also were a little lower than initially predicted.  Executives were expected to receive a 2.6% increase, but received 2.4%, while salaried exempt workers who were predicted to get a 2.7% increase also had to settle for 2.4%.  Salaried nonexempt employees and nonunion hourly employees also received just 2.4% increases, instead of the 2.6% and 2.7% increases predicted.  One bright spot for employees was the fact that only 21% of employers froze salaries in 2010, compared to nearly half (48%) of employers in 2009. Some Rebound Expected for 2011 Although pay increases likely will not reach the 3 to 4% rate that was more typical until 2009, the surveyed employers seem to be more willing to commit to pay increases closer to 3.0%.  (Employees have not seen increases of over 4.0% since 2001.)  However, any optimism is clearly mixed with ample doses of caution – employers continue to play a “wait and see game” as they delay hiring and capital investment decisions.  Uncertainty about likely tax increases have tempered employers’ responses, as have recent cost estimates for the new health care reform law showing that the reform will be more expensive than initially predicted.        With these concerns in mind, respondents to the Hewitt survey project that 2011 base salary increases will be higher than in 2010, but will once again stay under 3.0% for all categories of workers.  Executives, salaried exempt, and salaried nonexempt are all expected to receive a 2.9% increase.  Nonunion hourly employees can expect a slightly lower increase of 2.8%.  Another notable survey result is the fact that just 10% of responding companies expect to freeze salaries in 2011, although this number is still much higher than the 1 to 2% of companies that reported freezing salaries prior to 2009. Outlook Better in Certain Cities and Industries The survey results also show that workers in several major cities will receive pay increases that are greater than the national average projections, but not by much.  For example, salaried exempt employees in Washington, D.C. may see increases of 3.4%, while the same positions in Houston may receive 3.3% increases, and Pittsburgh workers likely will receive 3.2% raises.  On the other hand, the same employees in Philadelphia are expected to increase at a lower rate than is projected for the national average, at 2.5%, while employees in Atlanta and Los Angeles can expect raises of just 2.6%.      Certain industries are expected to have above-average increases as well.  For example, accounting/consulting/legal employees may see increases of 3.3% while energy (oil and gas), aerospace, and pharmaceuticals employees may see raises of 3.2%.  Industries with lower increases include education (2.3%), metals fabrication (2.6%), and automotive and forest/paper products (2.7% each). Performance-Based Pay Continues to Be Popular As in recent years, the survey indicates that employers continue to rely on compensation plans that do not raise base pay as a way of rewarding employees.  In particular, the use of variable compensation to supplement base salary continues to be a well-established practice.  (Hewitt defines variable compensation as performance-based awards that must be re-earned each year and that do not increase the base salary.)        Eighty-nine percent of the surveyed organizations report implementing at least one variable compensation plan in 2010, about the same as the last year (88%), but up from 80% in 2006 and only 51% in 1991.  Employers find these plans attractive because they are designed to reward performance, typically must be earned each year, and, as a result, do not permanently increase base salary budgets.  Employees also generally like the plans since their compensation can be increased, often substantially, if they meet specific goals. Hewitt Projections Historically Accurate  Historically, Hewitt’s projected salary increases have been accurate, averaging within two-tenths of a percentage point of the actual increases (see chart), though the 2009 survey predictions proved to be far rosier than what employers actually achieved since they were reported right before the economy took a nosedive in 2008.  This year’s projections likely are on target since employers seem to be feeling a little more optimistic.  But, the expiration of the Bush tax cuts, uncertainty over the true costs of health care reform, and the continued threat of new regulations could cause employers to pull back on salary increases.                            2009 (Prj)     2009 (Act)     2010 (Prj)       2010 (Act)     2011 (Prj) Executives               3.9%               1.4%               2.6%          2.4%          2.9% Salaried Exempt          3.8%               1.8%               2.7%          2.4%          2.9% Salaried Nonexempt     3.7%               1.9%               2.6%          2.4%          2.9% Nonunion Hourly          3.7%               2.0%               2.7%          2.4%          2.8%