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Base Pay Increases Remain Steady in 2007, Mercer Survey Finds
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Despite the strengthening economy and growing job market, salary increases will remain steady in 2007. According to the 2007/2008 US Compensation Planning Survey from Mercer Human Resource Consulting, US employers plan to award average pay increases of 3.8% in 2007, just slightly more than they granted in 2006 (3.7%). Pay increases are projected to remain flat at 3.8% in 2008. Those raises could be worth more in 2007 and 2008 however, if a forecasted drop in the consumer price index proves accurate. Meanwhile, employers, still cautious in their approach to increasing overall pay budgets, are placing greater emphasis on incentive plans to reward top performers.
The current edition of Mercer’s survey, which has been conducted annually for more than two decades, includes responses from more than 1,000 employers across the US and reflects pay practices for more than 12 million workers. The survey results are captured for five categories of employees: executive, management, professional (sales and non-sales), office/clerical/technician, and trades/production/service.
“Companies are looking for new ways to pay for performance and segmenting their workforce helps them identify their most valuable contributors,” said Steven E. Gross, global leader of Mercer’s Broad-based Performance & Rewards consulting business. “Rewarding top performers is essential for the ongoing success of the company.”
Mr. Gross noted that employees could benefit from a lower inflation rate, if forecasts by Georgia State University prove accurate. The Consumer Price Index, projected to be 2.0% in 2007 and 1.8% in 2008, stood at 3.4% in 2005 and 3.2% in 2006. Thus, although base pay increases have remained relatively steady in that period, base pay gains compared to inflation are projected to be the best in five years.
Pay differentiation
Employers always strive to pay high performers better than low performers, but as pay increase budgets remain flat, organizations are widening the performance differentials by granting significantly larger salary increases to high-performing employees, compared to those in the lower performing categories. According to Mercer’s survey, the highest-performing employees (12% of the workforce) are expected to receive base pay increases of 5.7% in 2007 compared to 3.5% for average performers (52% of the workforce) and 1.7% for the weakest performers (3% of the workforce).
“Top performers are getting salary increases that are about three times that of low performers,” said Mr. Gross. “Differentiating pay increases among employee groups allows employers to attract and retain those employees that enhance the company’s competitiveness and contribute to its success.”
Incentive compensation
Another way organizations are distinguishing among employees is by differentiating incentive compensation by performance rating. Mercer’s survey shows that the ratio for short-term incentive payouts by employee performance is consistent with that for base pay increases for most employee groups. For example, the highest performing managers are expected to receive average short-term incentive payouts of 27% compared to 10% for the lowest performers. Similarly, incentive payouts for high performing office/clerical/technical positions (15%) are nearly three times that of the low performers in the same group (6%).
“As companies struggle to afford and sustain compensation levels for employees, they continue to focus on variable pay,” explained Mr. Gross. “Incentives are a useful tool for supporting high levels of performance without increasing the fixed cost of base pay.”
Mercer’s survey reveals that 86% of companies offer short-term incentives to at least one employee group. Additionally, since 2004, 22% of organizations have increased the number of employees eligible for short-term incentives.
Overall, average payouts are higher than in prior years. According to survey findings, 2007 incentive payouts for all employee groups increased over 2006. On a percentage basis, this increase is most evident for lower level workers with payouts from 5% a year ago to 8-9% in 2007, although executives also did better with their average incentive payout increasing to 47% in 2007 compared to 40% in the prior year.
“Higher incentive awards, which reflect good corporate performance and increased demand for labor, now stand at a little more than 8% of annual base pay even for clerical workers, or nearly equivalent to a month's pay. That represents real discretionary income for most recipients,” said Mr. Gross.
Attracting, retaining, and engaging employees
Challenged with attracting, retaining, and engaging employees, organizations are pursuing a long-term approach to employee development. Mercer’s survey shows that 30% of companies are considering formal career planning as a means to continually developing internal talent. Additionally, 16% of the companies are considering the use of multi-rater feedback and 13% are considering competency-based performance management.
“As companies continue to focus on developing their employees, they are clearly striving to balance career opportunities with pay and benefits,” explained Mr. Gross.
Mercer Human Resource Consulting is the global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in over 180 offices and 41 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges.