While the economy is showing signs of improvement, U.S. employers remain concerned about the stability of the economy. This uncertainty is evident in the amount of money they are allocating toward pay raises and performance awards this year, according to a new survey by Hewitt Associates, a global human resources consulting and outsourcing company. Hewitt’s survey shows that companies are spending less on pay raises and variable pay awards in 2010 than they originally anticipated. But they are more optimistic about the future, with most expecting to bump up salary increases and variable pay awards in 2011.

Hewitt’s survey of more than 1,450 large companies shows that base salary increases for salaried exempt workers were 2.4 percent in 2010. These numbers are down from what employers originally projected in August 2009 (2.7 percent), but still higher than the record-low pay raises workers saw in 2009 (1.8 percent).

Salary increases are expected to bounce back slightly in 2011. For salaried exempt workers, salaried nonexempt workers and executives, Hewitt’s survey shows base pay increases of 2.9 percent. Nonunion hourly and union employees can anticipate salary increases of 2.8 percent.

“Going into 2010, employers were optimistic that they would be able to allocate more money towards compensation, but the lagging economy and lower-than-expected company performance forced many employers to revise their spending,” said Ken Abosch, leader of Hewitt’s North American Broad-Based Compensation Consulting practice. “We predict a similar situation in 2011. Right now, employers believe they'll be able to raise salaries next year, but if the economy remains unstable, they'll be forced to readjust base pay increases to offset other spending or revenue shortfalls."

Historical U.S. Salary Increases
    2007     2008     2009     2010     2011
(proj.)
Executives 4.0% 3.9% 1.4% 2.4% 2.9%
Salaried exempt 3.7% 3.7% 1.8% 2.4% 2.9%
Salaried nonexempt 3.6% 3.7% 1.9% 2.4% 2.9%
Nonunion hourly 3.6% 3.6% 2.0% 2.4% 2.8%
Union 3.3% 3.4% 3.4% 2.5% 2.8%
 

While 2010 salary increases are lower than expected, the news isn’t all bad. The number of companies freezing salaries this year was down significantly, and this trend is expected to continue into 2011. In 2010, 21 percent of organizations froze salaries, compared to nearly half (48 percent) in 2009. Just 10 percent of employers anticipate salary freezes in 2011.

Variable Pay Expected to Rebound in 2011

Like salary increases, spending on variable pay—or performance-based awards that must be re-earned each year—was also lower than expected in 2010 due in large part to lackluster company performance. In 2010, spending on variable pay as a percentage of payroll for salaried exempt workers was 11.3 percent, down from a record high of 12.0 percent in 2009. Spending in 2011 is expected to creep upward to 11.8 percent—which would be the second highest increase since Hewitt began tracking the data in 1976.

Hewitt’s survey also shows employers are—by and large—depending on company performance to budget for variable pay, though some are looking at additional funding sources. About three quarters (76 percent) are budgeting for spending on variable pay through improved company performance, while 12 percent are doing so through reduced merit increases and 10 percent by reductions in head count. Just 5 percent of companies are budgeting for variable pay through reduced spending on benefits, while 4 percent are doing so through pay freezes.

“Rising spending on variable pay indicates a shift in overall pay philosophies,” explained Abosch. ”Rather than rewarding employees for years of service, employers are tying a greater percentage of workers’ pay to their individual performance and the overall performance of the company. Structuring compensation programs this way gives organizations greater freedom to adjust budgets based on the economy and their performance, rather than being locked into the fixed costs associated with increasing base pay.”

2011 Salary Increases by Industry and City

According to Hewitt’s survey, workers in some U.S. cities can expect to see salary increases higher than the national average in 2011. These cities include Washington, DC (3.4 percent), Houston (3.3 percent) and Pittsburgh (3.2 percent). Cities that can expect lower-than-average increases in 2011 include Philadelphia (2.5 percent), and Atlanta and Los Angeles (2.6 percent each).

The industries that can expect to see the highest salary increases in 2011 include accounting/consulting/legal (3.3 percent); and energy, aerospace, pharmaceuticals, construction/engineering and real estate (3.2 percent each). The lowest increases are projected to be in education (2.3 percent), metals fabrication (2.6 percent), and automotive and forest/paper products (2.7 percent each).

About Hewitt Associates

Hewitt Associates (NYSE: HEW) provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com.

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