Next year, more than seven million Americans will see the lowest pay raises in 32 years, and that number is expected to rise as companies attempt to manage overhead costs in response to the economic crisis, according to a new survey by Hewitt Associates, a global human resources consulting and outsourcing company. But while base pay increases continue to decline, companies remain focused on attracting and retaining key employees by reserving a significant portion of their compensation budgets for variable-pay bonuses, or performance-based rewards that must be re-earned each year.

Since July 2008, Hewitt has conducted a series of surveys to determine employers’ likely actions around their 2009 compensation budgets. In December, Hewitt’s latest survey of 640 large companies, representing almost 13.5 million American employees, found that the recent economic situation and/or cost pressures have prompted half (50 percent) to make significant changes to their base salary spending in 2009, and another quarter (25 percent) of companies are still considering doing so. For those companies, base salary increases for all employee groups are expected to drop below 3 percent for the first time since Hewitt started tracking the data in 1976. Salaried exempt employees will see an average salary increase of 2.5 percent in 2009, down from 3.8 percent in July. Executive pay increases will drop from 3.8 percent to 2.2 percent, and salaried nonexempt will decrease from 3.7 percent to 2.6 percent.

Despite significant decreases in merit-based pay, Hewitt’s research shows most companies that offer variable pay programs are staying the course and not making drastic cuts to their 2009 budgets. For salaried exempt employees, spending on variable pay as a percentage of payroll is expected to be 11.1 percent in 2009, slightly lower than the projected increase of 12.1 percent in July. Variable pay spending for salaried nonexempt employees is expected to decrease from 6.1 percent to 5.7 percent. According to Hewitt, more than two-thirds (69 percent) of companies offer variable pay programs to employees, and another quarter (24 percent) plan to introduce one in 2009.

"Clearly, many organizations and some industries are being negatively impacted by the economy, and short-term adjustments to reduce fixed costs are required to avoid pay freezes, layoffs, or in some cases, just to survive," said Ken Abosch, North American practice leader for Hewitt’s Compensation Consulting business. "But employers aren’t making these decisions lightly. They realize that while employees may have more limited alternative employment options in today’s labor market, they cannot afford to be less competitive than other organizations in their industry, especially because the market for high-performing employees is still very active even in difficult economic times. Variable pay programs help organizations strike a balance between these two needs by allowing employers to more effectively manage fixed costs and focus on key business objectives, while at the same time motivating and rewarding employees for attaining performance goals and contributing to business results."

Salary Increases by Industry

Not surprisingly, the automotive industry is expected to dole out the lowest pay increases next year, with salaried exempt and salaried nonexempt employees averaging 1.4 percent, down from 3.5 percent as originally projected in July. Pay raises for automotive industry executives are projected to be 1.3 percent, down from 4.0 percent.

Employees in the education and the banking/finance industries will also see lower-than-average increases next year. Salaried exempt employees in education can expect to see pay raises of 2.3 percent in 2009, down from 3.5 percent in July. Pay increases for employees in the banking and finance industries will be 2.9 percent for salaried exempts next year, compared to 3.9 percent.

Industries that will continue to see above-average salary increases in 2009 include construction/engineering (4.5 percent), research and development (4.0 percent) and pharmaceutical (3.9 percent).