Salary Increases for 2011: What Part of 3% Don’t You Understand?

Raises have been pretty slim the last couple of years – guess that’s what happens when you have the worst economic downturn in 70 years – and the good news for 2011 is that the early forecasts say that they will be better.

But don’t hold your breath, because it doesn’t look like they will improve all that much.

New research by the global consulting firm Hay Group shows that planned salary increases for 2011 are expected to be 3.0 percent, and although that a sustained uptick relative to the low point in March 2009, it’s still well below the 4.5 to 5.0 percent increases at the beginning of this decade. After factoring in annualized consumer price index growth for 2010 at 2.0 percent, the final result is a “real” salary gain of just 1.0 percent overall next year.

The mix of pay is changing

“The contraction in the U.S. economy continues to cause U.S. businesses to exercise restraint in growing base salaries,” according to Tom McMullen, Hay Group’s North American Reward Practice Leader. “The performance-oriented, post-recession world in which organizations are operating has far-ranging implications for reward.”

“HR executives are looking for ways to balance the cost of reward programs and limited pay increases with the need to attract, retain and engage key talent,” McMullen added. “While there isn’t a significant shift in pay increases for the coming year, the mix of that pay is changing. As organizations emerge from the recession, they are shifting more focus from fixed to variable pay. This is partly cost-driven, as those organizations with higher proportions of variable pay tend to have more flexibility to cope with economic volatility. Variable pay has also proven to be an effective lever for motivating performance and aligning employees with the organization’s goals and priorities,” he said.

Hay Group forecasts are usually pretty accurate (this is their 30th year at it), and these results are based on the latest data available from Hay Group’s U.S. database, provided by more than 300 U.S. organizations from March through June 2010. Typical respondents to the survey include compensation professionals in HR departments of small to large size U.S. organizations across a wide range of industries. Hay Group’s U.S. database represents compensation practices for almost 2,900 companies and over 6.6 million employees.

Planned increases are consistent across the board

The latest survey data shows that at the beginning of this decade, salary increases were tracking between 4.5 to 5.0 percent, and then at a steady 4.0 percent from 2005 to 2008.

Then, the recession licked in, and the past three years have seen the lowest base salary increases that most employees have ever experienced. Despite that, The Hay Group survey shows that planned increases for 2011 are slightly higher than this time last year, and are consistent across executive, middle management, supervisory and clerical positions, and relatively consistent across most industry sectors.

If you are a senior manager or HR professional, this salary information should help you to start planning for what your organization will be doing as you get into the 2011 budgeting cycle

Unfortunately, it’s not what any one wants to hear, but it does reflect the reality of where the economy is right now – a little better, but not nearly as much as anyone was hoping for.

Yes, raises will improve in 2011, but not by all that much. Although The Hay Group survey isn’t the final word on that, it is a pretty good indicator of where things are going, and what you and your organization can expect as you prepare for next year.