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July 31, 2003
Survey: Employers Project Pay Raises Below 4 Percent
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.

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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.


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