Many organizations are now setting their salary-increase budgets for next year, but the unsure economic outlook has made planning for this process more difficult than ever. Given that the primary drivers of increased salaries are the rising cost of talent and predictable company profits, Sibson Consulting's research indicates that organizations will continue their moderate approach to salary increase budgets for calendar 2011. Further, recent trends indicate that the amount budgeted for salary increases may not always be spent, depending on how the year unfolds.
Sibson's Annual Compensation Planning Analysis Finds…
Each year, Sibson's Annual Compensation Planning Analysis of projected and actual salary increase budgets and structure salary-range adjustments1 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.
The Upward Trend Continues
After the economic downturn in the fourth quarter of 2008, salary increase spending decreased significantly. In an effort to preserve capital, more than one-third of organizations implemented hiring and salary freezes and a host of other cost-cutting measures. Actual salary increases in 2009 ranged from 1.3 percent to 1.7 percent,2 their lowest level since Sibson began conducting this study more than a decade ago.
In 2010, salary increase budgets rose to 2.0 percent to 2.2 percent, still well below historical levels. For 2011, the upward trend is expected to continue, with budgets rising another half a percentage point, to between 2.5 percent and 2.7 percent. (See Table 1 below.) These gradual moves reflect the fact that while uncertainty still exists in economic forecasts, the economy has stabilized to the extent that HR and finance leaders feel comfortable enough to plan increases in the growth rate of fixed payroll costs.
Salary-range increases are also expected to rise in 2011, slightly more than half a percentage point, to approximately 2.0 percent. (See Table 2 below.)
Key findings from Sibson's Annual Compensation Planning Analysis about actual 2010 results follow:
- Both salary and range increases were generally lower than what was projected.
- Salary-increase budgets for exempt and non-exempt employees were approximately 10 percent lower than estimates. Range increases for exempt and non-exempt employees were 20 percent to 25 percent lower than estimates. For executives, range increases were 35 percent lower than estimates.
- Industries with the lowest actual salary increase budgets and range adjustments were education, information services/telecommunications and transportation. Actual salary increases for these industries were between 20 percent and 35 percent lower than the cross-industry average for all employee segments. (See Table 3 below.)
- Industries with the highest actual salary increase budgets were manufacturing and utilities, yet increases were only modestly above the cross-industry average.
- In January through September 2010, the Consumer Price Index rose 1.8 percent over the same period in 2009. Although this 1.8 percent rate of inflation is historically low, it is in line with actual 2010 salary increase budgets, yielding relatively stable purchasing power year-over-year.
The key findings about 2011 projections from Sibson's Annual Compensation Planning Analysis are:
- The education, retail and transportation industries have the lowest 2011 projected salary increases; information services/telecommunications, insurance, nonprofits and utilities have the highest. (See Table 3 below.)
- After two years in which executive salary increases were either lower or the same as those for other employee segments, executive increases are projected to be higher than those for other populations in 2011. This is more in line with pre-2009 practices.
- While many organizations have removed hiring and salary freezes in the past 12 months, between 10 percent and 15 percent of businesses will continue these freezes into the first quarter of 2011.
TABLE 3: Average Salary-Budget Increases and Salary-Range Adjustments by Industry and Broad Job Classification
Employee Prioritization, Differentiation and Communication
Organizations should consider salary budgets as an investment in talent and prioritize allocations to their top performers.3 During difficult times, prioritization becomes even more crucial because companies still need to reward their best and brightest, but unlike "normal" years, have a much smaller 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 provide a bonus rather than a salary increase. This does not raise ongoing pay, yet delivers the message that performance matters.
Recent Sibson research indicates that top-performing pay-for-performance companies were nearly twice as likely to give their best performers merit increases that were 3 percent or more than what they gave their average employees. In 2009, a year when merit increase budgets were approximately 2.0 percent, 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.
A sound communications plan is a vital component in relaying key messages to employees and ensuring their continued engagement. According to Sibson's 2009 Rewards of Work Study,4 employees who are satisfied with their understanding of the compensation process and think decisions are "fair" are substantially more satisfied with their compensation outcomes.
The implication here is clear: organizations that manage compensation in a "black box" face a headwind with regard to pay satisfaction. Conversely, those that communicate their pay philosophy and the 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. This holds true both when salary budgets are high and low, as many employees, especially top performers, look not only to the absolute amount of pay, but rather pay relative to peers.
Executive Compensation Implications
Projected 2011 executive salary increases are higher than corresponding increases for the exempt and non-exempt populations. This reflects a return to the practice of prior years when executive increases outpaced those within other employee segments.
The passage of the landmark Wall Street Reform and Consumer Protection Act (aka., Dodd, Frank)5 requires public companies to give shareholders a non-binding "say-on-pay" vote in 2011. This up-or-down vote will be a litmus test of the organization's executive pay strategy, designs and levels. As a result, Sibson expects compensation committees and management teams will increase communications with institutional shareholders, enhance program disclosures within proxy statements and compensation discussions and analyses, and consider phasing out controversial designs (e.g., lucrative perquisites, severance arrangements and change-in-control practices).
While most experts agree that negative votes will be rare, a relative assessment of the organization's culture will probably take hold. Companies will not only look to whether they passed the vote, but whether they passed it by a wide margin or a margin that is consistent with their peer organizations. As such, companies are unlikely to enhance their programs this year, unless those changes are considered shareholder friendly.
Predictions: Educated Hypotheses
Given that it has been more than 12 months since the Great Recession officially ended6 and despite short-term uncertainty, Sibson thinks that 2011 actual salary and structure budget increases will likely approximate projected results or be slightly lower. This projection is based on the continued stabilizing of the macro global economy. If volatility increases or the markets suffer a renewed decline, organizations will be quick to act and reestablish previous budget freezes.
Sibson also expects modest inflation in 2011, such that employees' purchasing power will remain relatively unchanged from 2010 levels. With unemployment above 9 percent and continued conservative consumer spending, any movements in the cost of labor and the cost of living are likely to be congruent. The inflation debate will continue, however, over the next 12 to 24 months as economists disagree over how the magnitude and the timing of the remaining stimulus money and the size of the federal deficit will affect interest rates and prices.
About the author:
Jason Adwin is a vice president and consultant in the New York office of Sibson Consulting. He offers specialized expertise in compensation strategy, design and performance management, creating programs targeted at all levels of the organization. He can be reached at 212.251.5196 or at email@example.com.
1 A salary range is the minimum and maximum dollar amount for a salary grade. This is used as a guide to set individual employee salaries for a job.
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2 Note that 2009 projections were for the more typical 3.5 to 4.0 percent increases. Each year, this data is collected during the second and third quarters, which was before the 2008 fourth-quarter credit market crisis and stock market decline.
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3 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 Among the many provisions of the bill, the most notable include new federal agencies to monitor systemic risk in the markets, the regulation of hedge funds, the elimination of proprietary trading operations at depositary banks, increased orderly liquidation authority for the Federal Deposit Insurance Corporation aimed at ending "too big to fail," a new Bureau of Consumer Financial Protection, and new proxy rules requiring all public companies to give shareholders a non-binding "say-on-pay" vote.
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6 The Great Recession, a term that evokes the Great Depression, refers to the most recent recession, which began in the fall of 2007 and lasted until the spring of 2009.
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