“While these increases are greater than the 1.9% that employees actually received in 2009, the market is still tempering its outlook for 2010 as is evident by the swing from 3.0% increase budgets in the summer to 2.5% increases today. About a quarter of organizations decreased their salary budget increase estimates in the last 4 months,” according to Mel Stark, Vice President in the Reward Practice at Hay Group. “There are several things at play here,” added Stark, “many organizations put the brakes on salary increases in 2009 and a number of organizations had salary freezes due to tough economic conditions and company performance. The improved outlook for salary increases is due to both a more positive economic outlook as well as a feeling by management that it is difficult to provide nominal increases to organization workforces who have been asked to do more with less during difficult times.”
Hay Group’s research found that base salary increases are healthier in select industry sectors, such as life sciences, energy and financial services, and not as strong in the healthcare, health insurance and industrial sectors. “The economy does not impact each industry sector equally,” said Stark. “Therefore, pay increase fluctuations tend to flex with industry performance.”
“While these salary increase numbers are lower than we’ve seen in recent years, the primary concern for most employees right now is still job security,” added Stark. “Relatively speaking, a smaller base salary increase is not as concerning to employees as continued employment.”
According to Marie Dufrense, a leader in Hay Group’s Benefits Consulting Practice, “organizations have also focused their attention on continuing to manage their investment in employee benefits programs.” Approximately 40% of organizations reported in early 2009 that they had either reduced or eliminated their 401(k) employer contributions and of those, at least 30% reported recently that they are planning to reinstate the matches as of 2010. Of those organizations with defined benefit plans, they reported that more than 35% of them were freezing their plans in some form and based on the latest data there is no intent to reverse this trend.
Most organizations have looked carefully at their healthcare costs for 2010 and are increasing employee costs either through direct increases in contributions or changes to deductibles and copayments. Other alternatives being considered include additional medical options and designs which encourage behavioural changes in utilizing medical services. According to Dufresne, this is the year where a real focus on cost control is being implemented by most employers in an effort to not only control current year increases but to better manage future costs.
One area of concern suggested by Hay Group’s data is the lack of meaningful differentiation between increases for average performers and top performers/high performers. “Organizations seem to be spreading their salary increases thin and provide a little bit to everyone,” said Stark. Top performers and high potentials are averaging 2.8% compared to the 2.5% for all employees. “Organizations really risk their top talent exiting to other organizations if they don’t feel that their contributions are being recognized, financially and non-financially,” added Stark. “The only way to do this on the salary increase side is to zero out increases for marginal performers. Recruiters are getting more active and there is always a market for top talent – even in the toughest of business environments.”
From management’s perspective, organizations report a primary concern is maintaining employee engagement levels during a continuing period of challenging business performance. “Managers are really challenged in maintaining a motivated workforce environment in the midst of layoffs, base salary freezes and lower bonuses. Recognizing employee’s contributions and ensuring meaningful and impactful work opportunities in a healthy work climate go a long way in this economic environment,” said Stark.
