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Most employers expect to give pay raises next year, Mercer survey finds

Organizations plan to adjust their compensation practices for next year in response to concern over losing top talent after the past year of pay freezes and, for some, signs of economic recovery. According to Mercer’s 2010/2011 US Compensation Planning Survey, more than 98 percent of companies plan to award base pay increases in 2011. Moreover, just 2 percent of companies are planning across-the-board salary freezes next year compared to 13 percent in 2010 and 31 percent in 2009.

Of the employers projecting to grant base pay increases, the average increase is expected to be 2.9 percent in 2011, up from an actual 2.7 percent in 2010, but still down from 2009 levels (3.2 percent average). Unlike past years, expected salary increase levels for 2011 are even across most employee groups, however more employers are taking a segmented approach to salary increase allocations and continuing to focus on high-performing talent.

Mercer’s most recent survey on compensation trends, which has been conducted annually for more than two decades, includes responses from more than 1,100 mid-size and large 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.

“It looks like salary raises are back and for good reason,” said Catherine Hartmann, a principal with Mercer’s rewards consulting business. “The risk of losing key employees is top of mind as the economy recovers and certain labor markets improve. And while non-monetary awards such as career development and training are effective in retaining employees, employers realize that top-performing employees are loathe to going another year without an increase in pay. Investments in both cash and non-cash solutions will have a significant impact on avoiding post-recessionary flight.”

Furthermore, Mercer’s survey shows that short-term incentive payouts are projected to increase slightly. Overall, average payouts as a percentage of base pay for all employee groups remain stable. 

Differentiation for top performers. As organizations struggle to balance reward programs and limited budgets with the need to engage and retain talent, they are continuing to segment their workforce and rewards based on performance. As a result, the gap between high-performing employees and those in the lower performing categories is widening significantly. According to Mercer’s survey, the highest-performing employees (14 percent of the workforce) are expected to receive average base pay increases of 4.3 percent in 2010 compared to 2.6 percent for average performers (35 percent of the workforce) and 0.5 percent for the weakest performers (7 percent of the workforce).

“In the tug of war between limited resources and the need to retain critical employees, recognizing top performance is still clearly a driving factor,” said Ms. Hartmann. “Differentiating salary increases among employee groups is a necessity, allowing employers to make their investments on those employees that will advance the organization in the new economy.”

Differentiation for growth sectors. Despite salary increases being lower than what has been experienced in recent years, variations do also exist among industry sectors. Compared to the expected average pay increase of 2.9 percent in 2011, organizations within high-performing industries plan to grant higher increases. The Oil and Gas industry is among the highest with projected average pay increases of 3.5 percent followed by the Business/Professional Services industry at 3.2 percent. In contrast, other industries expect to award less in 2011, including Education at 2.6 percent and Real Estate at 2.5 percent.

“Despite budgetary constraints among all sectors, more stable growth industries are planning to provide raises for select employees,” said Ms. Hartmann. “In general, increasing pay will continue to be a challenging priority for employers until improved economic conditions are evident and the economic outlook significantly improves.”

Source:  2010/2011 US Compensation Planning Survey, released by Mercer on August 3, 2010; www.mercer.com.