U.S. employers are planning to give employees this year the largest merit increases since the start of the financial crisis, according to a new survey by Towers Watson, a global professional services company. The survey also found that the hiring freezes that were put into place during the recession are beginning to thaw, especially for professional and technical workers, and positions that require employees with critical skills.

The Towers Watson survey found that companies are optimistic and are budgeting merit increases of 3.0% for 2011. That compares with the 2.7% merit increase awarded to employees overall in 2010 and is the largest merit increase since before the financial crisis when increases typically averaged 3.5 – 4.0%.

Though the horizon is brighter for most companies, the survey also found that 5% of companies plan to freeze salaries for all workers this year, the same percentage as last year. However, 13% of companies plan to freeze salaries for executives while 12% plan to freeze salaries for hourly workers. Both figures are down sharply from 2010.

“Most companies have turned the corner and are now in a much stronger position financially to recognize and reward employees, especially their top performers,” said Laura Sejen, global head of rewards consulting at Towers Watson. “Throughout the recession and even afterwards, companies made it a high priority to provide better rewards to those employees who performed at the highest level and made the highest contributions to their organizations.”

Indeed, according to the survey, companies provided the largest merit increases (4.0%) in 2010 to workers who far exceeded their performance expectations, while those who exceeded expectations received a 3.4% average increase. Conversely, workers who did not meet performance expectations did not receive any increase in 2010.

Hiring Freeze Beginning to Thaw

The Towers Watson survey found that the hiring freezes that companies implemented during the recession are being lifted. Forty-two percent of companies are planning to hire workers for positions that require critical skills this year, while 40% plan to add professional and technical workers to their payrolls. One in four companies also plans to hire sales professionals and hourly workers in 2011.

The survey also reported that the attraction and retention challenges that employers are facing are confined to select employee groups - primarily critical-skill and top-performing employees. More than half (54%) of companies reported problems attracting critical-skill workers, while 37% are having difficulty hiring top-performing employees. About three in 10 companies report problems retaining critical-skill employees, while one in four have difficulty retaining top performers.

”As companies map out and implement their strategies to grow in a recovering economy, their ability to use not just pay but also the full complement of other reward and talent management programs to attract, engage and retain the best possible talent will be critical to their success,” said Sejen.