Employers Still Cautious in Approach to Increasing Worker Pay Budgets

Just weeks after a Conference Board survey found that pay increases for most salaried workers will stay below four percent, a new study by Mercer Human Resource Consulting confirms employers’ caution on worker pay increases despite continuing business expansion and a relatively buoyant economy.

Mercer’s 2006-2007 U.S. Compensation Planning Survey finds that American employers plan to grant average pay increases of 3.7 percent this year, just slightly more than they granted in 2005 (3.6 percent), and the same amount in 2007. The recent Conference Board findings pegged worker pay increases (for both exempt and non-exempt employees) at 3.5 percent.

The Mercer report found that employers, overall, remain cautious in their approach to increasing payroll budgets, but that most will concentrate on rewarding high performers and those with skills that are in high demand. The annual study included responses from more than 950 employers and reflects pay practices for nearly 12 million workers.

The budgeted pay increases in the Mercer study included: 3.9 percent for executives, 3.7 percent for management and professional staff, 3.6 percent for office/clerical/technician employees, and 3.5 percent for trades/production/service personnel.

Steven E. Gross, global leader of Mercer’s broad-based rewards consulting practice, says that the spread between salary increases and inflation continues to remain low in 2006 — less than one percent — reflecting uneven growth in the job market and reversing a trend from the late nineties, when pay increases tended to be two percent or more above inflation.

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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 valuable customers. The aim is to achieve the greatest return by attracting, retaining, and engaging those employees whose consistent, outstanding performance drive the company’s business success.

“Workforces are being segmented into performance drivers, enablers, and legacy drivers (those employees who created value in the past),” Gross says. “Variations in pay increases and other rewards reflect the company’s desire to drive productivity and engage the right talent in the right places.”

Apart from salary increases, the most popular methods of rewarding top performers are spot cash awards, project milestone awards and signing bonuses. Gross predicts that these alternatives to regular salary increases will become more important as labor markets become more competitive.