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2006 U.S. Compensation Outlook: Salary Increases Will Remain Modest, Despite a Strong Economy


Last updated 7/13/2010

Although the economy is fairly buoyant and many businesses are expanding, this will not mean significantly higher base pay increases for most employees this year. According to the “2006/2007 U.S. Compensation Planning Survey” from Mercer Human Resource Consulting:
  • U.S. employers plan to grant average pay increases of 3.7% in 2006, just slightly more than the 3.6% they granted in 2005.
  • Pay increases are projected to remain constant at 3.7% in 2007.
  • Employers continue to be cautious in their approach to increasing overall pay budgets and will concentrate on rewarding high performers and those with skills in demand.

The survey includes responses from more than 950 employers across the U.S. and reflects pay practices for nearly 12 million workers. Results are captured for five categories of employees: executive, management, professional (sales and nonsales), office/clerical/technician and trades/production/service.

“Still reluctant to increase base salaries, companies are focusing on variable pay and allocating reward dollars to employees with skills in high demand and to high performers,” said Steven E. Gross, global leader of Mercer’s Broad-based Rewards consulting.

Mr. Gross pointed out that the spread between salary increases and inflation continues to remain low in 2006—less than 1%*—reflecting uneven growth in the job market and reversing a trend from the late nineties, when pay increases tended to be 2% or more above inflation.

Attracting and Retaining Employees

Mr. Gross maintained that companies are beginning to segment their workforce to identify the most valuable contributors, in a methodology similar to how they use market segmentation to identify their most important customers. The objective is to achieve the greatest return by attracting, retaining and engaging those employees necessary for the ongoing success of the company.

“Workforces are being segmented into performance drivers, enablers and legacy drivers (those employees who created value in the past), determined by the combination of business and market life cycles, business designs, geographies and reputation of the corporate brand,” Mr. Gross said. “Variations in pay increases and other rewards reflect the company’s desire to drive productivity and engage the right talent in the right places.”

According to Mercer’s survey, apart from salary increases, the most prevalent vehicles being used to reward employees with strong skill sets are spot cash awards, project milestone awards and signing bonuses. These programs will likely become more important as labor markets become more competitive.

Information Technology makes particular use of these incentives, with spot cash awards used by 85% of responding organizations, project milestone awards used by 77% and signing bonuses by 67%. Spot cash awards are also popular among other job families, including Accounting and Finance (78%), Human Resources (73%) and Sales and Marketing (69%).

As organizations look for ways to identify and reward their top employees, they are pursuing a long-term development approach. Mercer’s survey asked about emerging reward practices and found that 28% of participating companies are considering formal career planning as a means to continually develop internal talent. Additionally, 15% of the companies Mercer surveyed are considering competency-based performance management and 15% are considering the use of multirater feedback.

“Companies continue to focus on developing their own employees to create differentiation in the marketplace,” said Mr. Gross. “Career development and advancement play a significant role in an employee’s decision to join or stay with an organization.”

Pay Differentiation

Another way organizations are distinguishing among employees is by differentiating pay increases to reward high performers. Companies surveyed said that the budgeted pay increases for high performers (5.0%) would typically be twice that of low performers (2.5%) in major employee groups ranging from management to office/clerical/technician positions.

According to Mr. Gross, organizations depend on the skills and talents of their workforce to stay competitive, and rewarding top performers more than average or poor performers is one way to enhance competitiveness.

Other Trends

Mercer’s study also examines emerging practices with respect to reward programs. Among the findings this year:

  • Companies continue to look at variable pay as they struggle to afford and sustain compensation levels for employees. Some 85% of companies plan to offer short-term incentives to at least one employee group in 2006. Additionally, since 2003, 24% of companies indicated that the number of employees eligible for short-term incentives has increased.
  • When asked what compensation investments have been implemented or are being considered, 36% of respondents said they had increased pay differentiation based on performance, with an additional 9% considering doing so.
  • For the seventh year in a row, formal nonmonetary recognition awards top the chart, with 71% of responding organizations offering them while another 6% are considering doing so.
  • The use of broad-based equity (such as stock options) continues to decline from its peak of 37% in 2002 to 19% in 2006, with only 2.1% of responding organizations considering implementing such rewards.

For more information or to purchase the full report of Mercer’s 2006/2007 US Compensation Planning Survey, visit www.imercer.com/cps or call 1-800-333-3070.

*Source: Economic Forecasting Center of Georgia State University.