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2012 SALARY INCREASE PROJECTIONS

November 30, 2011

Although salary increase budgets in the U.S. have shown some recovery and stabilizing over the past two years with average increases coming in at a little below 3%, they have only increased slightly from declines witnessed during the Great Recession (timeframe: Dec. 2007 – June 2009). And while the general forecast for 2012 is for a slight increase from 2011 levels, this only amount to tenths of a percent increase.

For a broader picture of what is occurring and what is expected for salary increases, let’s take a look at salary increases over the past several decades. Prior to the Great Recession, we should remember that average salary increases had been hovering between a low of somewhere above 3.5% and a high of just under 4.0%. This range remained fairly constant between the period of time after 9/11 and up until 2008. If you go back in time before 9/11, there was a lengthy period of time in the 1990s where average salary increases remained above 4.0%. In general, however, if you look back over past decades you can see a steady downward slide. Except for a period of very high inflation in the late 70s/early 80s, average salary increases have slowly decreased. The chart below is provided by WorldatWork and depicts the gradual decline of average salary increases in the U.S. for several groups of workers.

 

With the Lehman financial shock in September 2008, average salary increases collapsed to approximately 2.0% in 2009 due to the large volume of companies freezing salaries. Although there has been some recovery in 2010 and 2011, employers are more bearish than bullish regarding the economy and are therefore being extremely cautious with spending. In addition, considering we’ve had a number of economic shocks in 2011 (i.e., Great East Japan Earthquake disaster, Arab Spring, U.S. & European debt crises), if economic conditions change, any projections for 2012 could slide.

With average salary increases stabilizing at somewhere under 3.0% for the past few years, it’s highly likely that 3.0% given a few tenths of a percent either below or above it will be the new norm for the foreseeable future.

The following chart provides highlights of the largest annual salary budget surveys.

Projected Pay Budgets – 2012

Actual Pay Budgets – 2011

Survey Source # of Companies Surveyed Executive Exempt Non-Exempt Executive Exempt Non-Exempt
WorldatWork

2,526

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

Hay Group

N/A

3.0%

3.0%

3.0%

2.9%

2.9%

2.9%

Aon Hewitt

500

3.1%

3.0%

3.0%

2.9%

2.8%

2.7%

Mercer

1,200

2.9%

2.9%

2.9%

2.8%

2.7%

2.7%

Towers Watson

773

2.8%

2.8%

2.8%

2.6%

2.6%

2.6%

Conference Board

415

3.0%

3.0%

3.0%

3.0%

3.0%

3.0%

ERI

N/A

2.9%

2.8%

2.7%

2.3%

2.2%

2.1%

 

With all of this in mind, however, let’s finish the discussion with the biggest factor affecting all of this and that is variable pay.

Variable pay, or performance-based incentives have been a growing phenomenon over the past few decades. Every year, it is reported that more and more companies are using variable pay schemes. In fact, Aon Hewitt reported that 92% of companies they surveyed are using variable pay programs in 2011. This has increased from 78% in 2005. Overall, it could be strongly assumed that employers are putting more emphasis on variable pay and less on base salary increases. The same Aon Hewitt 2011 survey reports that employers are budgeting in excess of 11% of payroll for variable pay.

Thus, the growing use of variable pay, along with lower salary increases is most likely a strong trend to continue. Any employer not using or considering some form of variable is most likely to be at a competitive disadvantage.

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