Employers say that pay increases will average 3.3 percent in 2003 and will be 3.5 percent in 2004, according to a new survey from Mercer Human Resource Consulting.
This would mark the third consecutive year - corresponding to the economic
downturn - that annual pay increases have been less than 4.0 percent. For a
stretch of eight years prior to 2002, annual pay increases averaged 4.1 percent
to 4.4 percent before dipping to 3.8 percent in 2002. The survey includes responses
from more than 1,700 U.S. employers and reflects the pay practices of nearly
15 million workers
These figures include data from employers who are planning to freeze salaries
for at least part of their employee population in light of current economic
conditions. When these 0-percent pay increases are removed from the calculations,
pay increases average 3.6 percent for both 2003 and 2004 among employers who
are planning to grant a pay increase of some level.
The projected 2004 pay increases vary by employee group, with executives slated
to receive the largest increases next year (3.7 percent) and nonunion hourly
employees slated to receive the smallest increases (3.4 percent).
"In the current environment, employers are less concerned with 'chasing
the market' in terms of pay," says Steven E. Gross of Mercer. "Today,
they are more internally focused on what they can afford. They can do this because
the balance of labor supply and demand has tilted in their favor, at least temporarily."
However, he notes, lower pay-increase budget levels have created a new challenge
for employers - allocating the pay-increase "pie" based on employee
performance. "With a budget of just over 3.0 percent, it's hard to make
a meaningful differentiation between a top performer and a low performer, and
it forces employers to make hard choices," Gross says. "In order to
give their outstanding employees a 5.0 percent-plus raise, employers may need
to consider giving no pay increase at all to employees with sub-par performance."
A small but significant minority of employers (12 percent) indicated that they
froze salaries for at least some of their employees in 2003 (for instance, executives
received no pay increase but all other employee groups did). The figure for
salary freezes was 16 percent in 2002. Very few employers have indicated that
they will freeze employee pay in 2004, Gross says, largely because they expect
the economy to improve before then.