All You Need to Know About 2012 Pay Raises: “3 Percent is the New 4 Percent”

Everybody knows that pay raises and salary increases have only edged up slightly from the worst of the Great Depression years (unless you are a CEO or work on Wall Street, of course), but rarely have I seen or heard anyone capture the essence of this issue as succinctly as this.

It comes from Ken Abosch, the Compensation group leader over at global HR consultant Aon Hewitt, and when it comes to the prospects of getting a nice salary bump next year, he tells it like it is.

“Three percent is the new 4 percent, meaning we are not likely to be back to the 4 percent levels of the late 1990s any time soon,” Abosch says. “Employees should also keep in mind that despite employers anticipating increases, if current economic conditions continue, the 2012 projections may come in lower than anticipated.”

That just about covers it, doesn’t it? Welcome to the new normal.

An average 2012 projected pay hike of 2.9%

Abosch’s comments come as part of Aon Hewitt’s release of its 2012 U.S. Salary Increase Survey, and although it’s not grim news, it’s not exactly the kind of information that will make you run out and buy that new sports car, either.

According to the survey, pay raises in 2012 will run around 2.9 percent — similar to what earlier 2012 projected increases are forecasting. And while this represents a slight uptick in salary increases in 2012 compared to 2011, according to Aon Hewitt, they say that “companies will continue to place the greatest focus on variable pay.”

Here are the details:

“Aon Hewitt surveyed 1,494 large U.S. companies in June and July, which revealed a 2.9 percent base salary increase projection in 2012 for salaried exempt (employees who do not receive overtime pay), executives, salaried nonexempt (employees who receive overtime pay) and non-union hourly workers. This is up slightly from 2011 for all groups – salaried exempt (2.7 percent), executive (2.8 percent), salaried nonexempt (2.8 percent) and non union hourly (2.7 percent), and more than a percentage point better than the record-low pay raises workers saw in 2009 (1.8 percent).”

Salary freezes continue to drop

In addition, the survey also found that:

The number of companies freezing salaries is down for a second year in a row. This trend is expected to continue into 2012. In 2011, 5 percent of organizations froze salaries, compared to 21 percent in 2010 and nearly half (48 percent) in 2009. Approximately 4 percent of employers anticipate salary freezes in 2012.
Variable pay plans, or performance-based award programs where the award must be earned each year, reached an all-time high in 2011, with 92 percent of employers implementing this type of program. This is a significant increase compared to 2005, when just 78 percent of employers offered variable pay.
Economic pressures have had a slight impact on variable pay this year, as organizations had anticipated spending 11.8 percent of payroll on these programs for salaried exempt employees. Instead, employers have earmarked 11.6 percent of payroll for variable pay this year. Spending in 2012 is expected to dip slightly to 11.5 percent.
Salaried exempt workers in some U.S. cities can expect to see salary increases higher than the national average in 2012. These cities include Detroit (4.0 percent), Dallas (3.4 percent), Chicago (3.0 percent), Houston (3.0 percent) and Milwaukee (3.0 percent). Cities that can expect lower-than-average increases in 2012 include Washington, D.C. (2.8 percent), New York (2.7 percent) and Philadelphia (2.7 percent).
Industries that can expect to see the highest salary increases in 2012 include, energy/oil/gas (3.6 percent), real estate (3.6 percent), construction/engineering (3.5 percent), telecommunications (3.2 percent) and not-for profit (3.2 percent). The lowest increases are projected to be in government (1.7 percent), building materials (2.5 percent), research/development (2.5 percent), rubbers/plastics/glass (2.6 percent) and education (2.6 percent).

Small raises are the new normal

“The growing use of variable pay, along with lower salary increases, represents the new normal in compensation practices for employers nationwide,” explained Aon Hewitt’s Abosch, in a press release about the salary survey.

“This pay mix creates greater motivation for employees to be productive and greater flexibility for employers to compensate based on individual and company performance,” he added. “However, this does create a need for performance discussions throughout the year, so employees know what they are doing well and areas for improvement in order to maximize productivity and potential pay opportunity.”

Yes, this survey makes clear what we have all seen coming for some time — the days of employees getting hefty annual pay increases as a matter of course are probably gone for good. The new normal, if you can call it that, seems to be relatively small annual increases of between 2-4 percent with some variable pay for performance mixed in.

Employees everywhere will have to prove their worth with strong performance each and every year if they want employers to show them the money. There’s nothing wrong with that, of course, but it is a fundamental shift in salary practices that rank-and-file workers are going to have to get used to. It’s been the way pay for managers has been handled for some time, but it took the Great Recession to make it more common place for the entire workforce.