December 2012

VOL. 20   ISSUE 3

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As organizations complete their salary-increase budgets for 2013, Sibson Consulting's analysis indicates that budget levels will once again increase modestly from the previous year, continuing a trend that is now several years old.

Sibson's Annual Compensation Planning Analysis

Sibson’s Annual Compensation Planning Analysis of projected and actual salary-increase budgets and structure salary-range adjustments provides data for three broad job classifications — executive, exempt and non-exempt, in 11 distinct industry groups — banking and finance, education, health services, information services/telecommunications, insurance, manufacturing, nonprofit, retail, services, transportation and utilities.

Salary-Increase Budgets Inch Higher

In 2012, actual salary-increase budgets ranged narrowly from 2.7 percent to 2.8 percent, slightly above 2011 results, yet still well below pre-recession levels, which were typically in the 3.5 to 4.5 percent range. For 2013, all employee classifications have projected salary-increase budgets of 2.9 percent, reflecting an increase of 10 to 20 basis points (bps)1 from 2012 actual results. (See Figure 1 below.) These modest year-over-year increases mirror the slow pace of the U.S. economic recovery and reflect business leaders’ conservatism on financial forecasts and relatively low demand in the labor market.2

 

It is interesting to note that the gap between executives and other employee populations has closed over the past two years. Historically, executives typically enjoyed a greater salary-increase budget than other populations, usually by 10 to 30 bps. The exception to this trend is in times of extreme hardship when executives may forgo salary increases and/or decrease their fixed compensation.3

Salary-Range Adjustments

Salary-range adjustments are also expected to rise slightly in 2013, by 20 bps to 1.9 percent for all job classifications. (See Figure 2 below.) Salary-range adjustments in 2012 were 10 percent lower than projected. This likely reflects typical postponement of range increases, which helps moderate salary expenses for the highest-paid employees in the various pay bands.

Industry-Specific Data

Key findings from Sibson’s Annual Compensation Planning Analysis about industry-specific data follow:

Inflation

While employers are primarily concerned with the cost of talent rather than the cost of living, in January through September 2012, the Consumer Price Index for All Urban Consumers rose 2.1 percent over the same period in 2011. This compares to a 3.1 percent increase for the same period between 2011 and 2010. The current rate of inflation continues to be low. Because it is lower than last year, the actual 2012 salary-increase budget of 2.7 to 2.8 percent means employees’ purchasing power is relatively unchanged. It is important to note that since the data is provided through September 2012 only, results may change in the fourth quarter. Factors that could lead to a higher increase in the CPI include volatile energy prices and food prices, which may be affected by the summer 2012 drought that reduced yields for grain and other crops.

Employee Prioritization and Differentiation

Organizations should continue to consider salary-increase budgets as an investment in talent and prioritize allocations to their top performers.4 It is important to remember that prioritization is even more crucial in difficult times when companies still need to reward their best and brightest, but have a relatively small pool of money with which to work.

Companies should not give up on pay differentiation, even if budgets are small. One approach is to provide salary increases only for certain segments of employees, such as top performers, employees in critical jobs or those whose compensation is below market. A second approach is to carve out a portion of the budget and deliver that exclusively to the highest-performing employees. This ensures a premium investment is made in those few employees who truly create value.

Sibson research indicates that top-performing pay-for-performance companies are nearly twice as likely to give their best performers merit increases that are 3 percent or more than what they give their average employees. Over the past few years, when merit increase budgets were approximately 2.5 percent or less, top performers at these companies were twice as likely to see increases of 5 percent of base salary or more. This shows that while differentiation may be difficult, it is possible.

Executive Compensation Implications

Projected 2013 executive salary increases are equivalent to those for the exempt and non-exempt populations. While there is not yet enough data to indicate a meaningful trend, this does suggest that companies are transitioning away from the pre-recession practices where executive increases outpaced those of other employee segments. The reason for this may be traced to overall sensitivity to executive compensation levels and the way the media portrays compensation differentials between executives and average employees. Increasingly, compensation committees responsible for approving executives’ salaries are reviewing proxy advisory firms’ assessments and managing how executive pay, including salary increases, is perceived.

Also influencing the issue is the Wall Street Reform and Consumer Protection Act (Dodd, Frank), which gave public company shareholders a non-binding “say-on-pay” vote on executive pay. This up-or-down vote serves as a litmus test of an organization’s executive pay strategy, designs and levels. Say-on-pay has generally increased the public profile of executive compensation packages, requiring compensation committees to take steps to ensure executive pay practices are unassailable. Two years of say-on-pay votes have led to increased communications with institutional shareholders, enhanced program disclosures within proxy statements, improved discussion and analysis within compensation committees and the phasing out of controversial designs (e.g., lucrative perquisites, severance arrangements and change-in-control practices).

The Role of Communication

A sound communications plan is a vital component in relaying key messages to employees and ensuring their continued engagement. Employees who have a good understanding of the compensation process and think decisions are made “fairly” are substantially more satisfied with their compensation outcomes, even if the increase levels are lower. This highlights the importance of managing communications and creating transparency in the compensation system.

The implication is clear: organizations that fail to manage compensation transparently face problems with regard to pay satisfaction. Conversely, those that communicate their pay philosophy and their rationale for pay decisions and place appropriate context on how they arrive at individual decisions are more likely to have employees who are satisfied with their compensation.

Organizations can better satisfy their workforce with a smaller investment in increased compensation if the process is communicated clearly and administered consistently. This holds true both when salary-increase budgets are high and when they are low, as many employees, especially top performers, look not only at the absolute amount of pay delivered, but also at pay increases relative to peers.

Outlook for the Future

Actual salary budget increases for the last two years (2011 and 2012) have approximated Sibson’s study projections. As long as companies maintain confidence in their financial forecasts and there is general stability in the global economy, this trend is likely to continue. Salary-increase expenditures could, however, quickly be derailed by volatility generated by hot-button issues. These include lingering concerns over the European economy (i.e., debt and the viability of the euro), congressional inaction on the looming fiscal cliff,5 uncertainty regarding future U.S. tax policy (corporate and individual) and the impact of continued high unemployment.

Organizations have shown that if any of the above factors affect their growth and profitability forecasts, they will not hesitate to reduce or eliminate their salary-increase budgets. A lesson learned from 2009 is that the amount that is budgeted may not be the amount that is spent.

 

About the author:

Jason Adwin is a vice president and consultant with Sibson Consulting. He offers specialized expertise in compensation strategy, design and performance management, creating programs targeted at all levels of organizations. He can be reached at 212.251.5196 or at jadwin@sibson.com.


 

1 As a reminder, 10 basis points equal 0.1 percent.
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2 The unemployment rate was 7.9 percent as of October 2012.
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3 This last happened in 2009 when executive increases were 1.3 percent while the increases for exempt and non-exempt populations were 1.6 percent and 1.7 percent, respectively.
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4 For real-world strategies for optimizing investment decisions, see the articles “Reducing the Sense of Entitlement: Pay for Performance for 2010 and Beyond” in the July 2009 issue of Perspectives and “Small Packages = Big Bucks: Making Merit Matter” in the January 2007 issue of Perspectives.
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5 The fiscal cliff refers to the reduction in the budget deficit and a corresponding slowdown of the economy if specific laws expire and/or go into effect at the beginning of 2013. These include tax increases that result from the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 and spending reductions under the Budget Control Act of 2011.
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