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August 13, 2001
4% Raises Planned - For Now
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Employers plan to grant raises of just over 4 percent in 2001 and 2002 in keeping with what they have given for the last seven years, but economic performance in the third and fourth quarters may cause some to rethink that, a new study finds.

The 2001-2002 U.S. Compensation Planning Survey from HR consultant William M. Mercer Inc. looked at the pay practices of more than 1,500 organizations, representing more than 14 million US workers.

Overall base pay increases being granted in 2001 and planned for 2002, 4.4 percent and 4.3 percent, respectively reflect a trend that dates back to 1994, with base pay increases holding steady while employers increasingly emphasize variable, or incentive, pay.

But because inflation has been low, employees have seen real income growth over this time.

Ten-Year Trends in Base Pay Increases and Inflation
(Line graph shows base pay increases; bars show CPI-U)

Mercer's new survey shows minimal differences in 2002 base pay increases among various employee groups, with executives expecting increases of 4.4 percent compared to nonunion hourly workers, who are projected to receive increases of 4.1 percent.

There also is little variation by geography. Average base pay increases for 2002 are expected to be 4.4 percent on the West Coast and in the South Central states. Companies in other regions (Northeast, Southeast, and North Central) are projecting average pay increases of 4.3 percent for 2002.

More variation is seen by industry, however. The highest average pay increases in 2002 are projected for computer software/services (5.6 percent), consulting/ legal/ accounting (5.1 percent), and telecommunications (4.8 percent). The lowest average pay increases by industry are expected in agriculture (3.7 percent), followed by chemical, mining/milling/smelting, and paper and allied products manufacturing (all at 3.9 percent).

"Our survey, which was conducted during early second quarter, indicates that employers had planned to 'stay the course' on base pay increases in 2001 and 2002," says Steven E. Gross, leader of Mercer's employee compensation consulting in the US. "However, as the year progresses, we find that more of them are thinking about alternative actions in case third and fourth quarter performance does not meet expectations."

Such actions, Mr. Gross notes, might include:

  • Lengthening the time between salary increases from the typical 12 months to 14 months, 16 months, or even 18 months.

  • Reducing average increase budgets by one or two percentage points, still reserving larger increases for top performers and employees with critical skills.

  • Substituting incentive compensation opportunities for base pay increases, thus changing the overall mix of fixed and variable compensation costs.

  • Using one-time, lump-sum awards in lieu of salary increases, thereby reducing fixed costs on an ongoing basis.

"Especially in difficult economic times, employers want to invest their reward dollars where they can most strongly influence employee behaviors and business results," Gross says. "These are tough choices, but in recent years companies have made significant investments to recruit and develop talent. They must maintain these critical skills and high performers, unfortunately sometimes at the expense of other employees."

Emerging practices

Mercer's annual survey also looks at emerging practices in human resources, especially as they relate to compensation and performance management. Key findings from this year's survey include the following:

-- The use of competency-based programs is increasing (these focus on the behaviors involved in performing a job in addition to what is actually accomplished). This year, 19 percent of the survey respondents report using competency-based pay (up from 7 percent three years ago) and another 17 percent are considering doing so. The use of competency-based performance management has grown from 20 percent to 28 percent over the same three-year period, and another 20 percent are considering it.

-- The use of multi-rater feedback (when peers assess the job performance of their co-workers) has grown from 21 percent to 28 percent over the past three years, and another 18 percent of the survey respondents are considering using this approach. With fewer levels of management and less overall supervision today, peers are often in a better position to gauge an employee's performance, Mr. Gross notes.

-- While 21 percent of the survey respondents currently have formal career planning, another 23 percent are considering implementing such a program, most likely as a means of capturing a return on their people investment.

-- Thirty-six percent of the survey respondents offer individual non-management incentives, but another 21 percent are considering such a program as a way to reinforce a pay-for-performance philosophy.

Mercer's survey also shows that 57 percent of the companies surveyed now have incentive plans in place for employees below the executive/manager level, and 41 percent have increased the target payout opportunity for employees over the last three years.

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