Restrained pay raises likely to continue next year

By Stephen Miller, CEBS Aug 7, 2017

With salary increase budgets expected to remain at 3 percent for both 2017 and 2018, employers are continuing to leverage variable pay to differentiate rewards for high-performers.

"With a tight job market and reported financial gains, we might have expected to see more growth in salaries," said Kerry Chou, WorldatWork senior practice leader. "In the United States in particular, there are factors that might explain this plateau in growth, including the increased use of variable pay or noncash-based rewards."

Variable Pay

As companies hold down base pay increases to maintain a handle on fixed costs, "employees are still seeing increases in pay through improved variable pay plan payouts," Chou said.

The percentage of organizations using variable pay vehicles—such as annual or quarterly bonuses based on individual, team and organizational goal achievement—rose 1 percentage point for the third straight year, to 85 percent in 2017, according to research from WorldatWork, an organization of total rewards professionals, in its new 2017-2018 Salary Budget Surveyreport.

Variable Pay Programs (U.S.) Variable pay awards, representing a percentage of base pay, are differentiated by employee classifications. Results are shown for the median* percentage.
	Nonexempt Hourly Nonunion	Nonexempt Salaried	Exempt Salaried	Officers/ Executives
Average percent paid, 2016	5.0%	5.0%	11.0%	34.0%
Projected percent paid, 2017	5.0%	5.0%	12.0%	35.0%
Source: WorldatWork. *The median is the middle value after listing reported budget increase expectations in successive order. Outliers, or extreme values on either the high or low end, have less effect on the median than on the mean, which is the mathematical average.

The report reflects the results of a survey of WorldatWork members, most of whom work at large companies. Survey data was collected from March 27 through May 5 and included 1,819 respondents from U.S. organizations with at least 10 employees. "Top level" results from the survey were released last month.

Merit Salary Increase Awards

Base salary increases are being awarded to 89 percent of employees in 2017, on average. For high-performers, the anticipated 2017 median merit increase award remains at 4.0 percent, the same as last year. 

2017 Merit Increase Awarded by Performance Category Results are shown for the median percentage.
	High Performers	Middle Performers	Low  Performers
Percentage of employees estimated to be rated in this category	22%	70%	5%
Average merit increase estimated for this performance category	4.0%	3.0%	0.0%
Source: WorldatWork.

Minor Regional Differences

As in recent years, a comparison of salary budget increases among employers in different states for 2017 showed little variance. The average (mean) increases ranged slightly from 2.9 percent to 3.1 percent, with the median at 3.0 percent for every state.

Metropolitan areas showed a bit more average salary budget variance this year, ranging from 3.0 percent to 3.3 percent.

"The metropolitan areas that show the highest percentages, such as the Pacific Northwest, Los Angeles, Dallas or Atlanta, tend to be in regions of the U.S. that are driven by high-tech or minimum-wage increases," Chou noted.

No city came in below the 3 percent number. The highest average salary budget increases this year were in:

• Atlanta: 3.3 percent.
  
• Dallas: 3.2 percent.
  
• Los Angeles: 3.2 percent.
  
• Portland, Ore.: 3.3 percent.
  
• San Francisco: 3.2 percent.
  
• San Jose, Calif. 3.2 percent.
  
• Seattle: 3.2 percent.
  

These findings also may in part reflect local and state government increases to minimum-wage rates, Chou said.

Another View of Merit Pay

Separately, New York City-based compensation firm Empsight shared preliminary results from its 2017 Policies Practices and Merit Report during a webcast at the end of July. The findings are based on mostly multinational and Fortune 500 companies in the firm's client database (70 percent with revenues above $5 billion).

The firm provided this comparison of merit increase budgets for 2017 and 2018.

Merit Increase Budget for 2017
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	2.79%	2.50%	3.00%	3.00%
Management	2.76%	2.50%	3.00%	3.00%
Professional	2.77%	2.50%	3.00%	3.00%
Support/Nonexempt	2.78%	2.50%	3.00%	3.00%
Source: Empsight.

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Merit Increase Budget for 2018
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	2.81%	2.50%	3.00%	3.00%
Management	2.82%	2.50%	3.00%	3.00%
Professional	2.82%	2.70%	3.00%	3.00%
Support/Nonexempt	2.82%	2.70%	3.00%	3.00%
Source: Empsight.

"Overall, merit budgets remained the same from 2016 levels across all industries," said Susan Bell, principal consultant at Empsight. While slightly higher budgets were found in the professional service, pharmaceutical, energy and consumer product sectors, "overall, merit budgets remained the same from 2016 levels across all industries," she said.

"The forecast appears slightly higher in 2018 merit projections versus 2017, but not by much," she noted. "Expectations are that spending will remain the same."

Total compensation increase budgets, which include merit increases, promotions and special adjustments, ranged between one-quarter to one-third percent on top of merit increases, Empsight found.

Total Compensation Budget Forecast for 2018
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	3.22%	3.00%	3.00%	3.50%
Management	3.23%	3.00%	3.00%	3.50%
Professional	3.23%	3.00%	3.00%	3.50%
Support/Nonexempt	3.24%	3.00%	3.00%	3.50%
Source: Empsight.

"The 2018 forecast expects about the same spending across job levels, which is up only slightly from 2017," she noted. Overall total compensation budget increases are forecast to increase 3.25 percent (mean) and 3.00 percent (median) for 2018, compared with 3.21 percent (mean) and 3.00 percent (median) for 2017.

"Companies tend to target the median of the marketplace for both base and total cash compensation," added Jeremy Feinstein, Empsight managing director.

"For almost the last eight years, it's been a 3-percent merit world," limiting employers' ability to use pay to foster employee retention, he noted.

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Source: Society for Human Resource Management (SHRM)

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