Salary-Hike Outlook for 2008 on the Weak Side, Survey Finds

Being a worker isn't getting any easier. We're moving from traditional pensions to
401(k)s, full-scale health insurance to consumer-driven health plans and steady annual salary increases to one-time "pay for performance" bonuses and incentives.

Base salaries are expected to increase about 3.9% on average in 2008, matching the average pay increase in 2007, according to a new Towers Perrin survey of about 4,000 companies worldwide. Those results match a number of other salary-expectation surveys.

It's not much when you consider inflation in October rose at a 3.5% annual rate. But more employers now supplement salaries with one-time bonuses and rewards, with more than 90% of employers offering such "variable pay" this year, up from 80% in 2006, according to an annual survey of about 1,000 large U.S. employers by Lincolnshire, Ill.-based Hewitt Associates, the human-resources consulting firm.

Spending on such programs hit almost 12% of employers' payroll budgets on average this year, up from 9% in 2003, and Hewitt expects that figure to top 12% in 2008.

So, there is money available beyond traditional salary hikes, but it's only available to certain workers who meet and exceed companies' performance expectations.

"The risk of earning a competitive wage is now increasingly on the employee's shoulders," said Ravin Jesuthasan, a Chicago-based managing principal and practice leader at Towers Perrin, the Stamford, Conn.-based consulting firm.

"If you go back to the mid- to late-1990s, we saw [salary budget increases] in the 6% to 8% range," but that all changed after the economy tanked after 9/11, Jesuthasan said.

"Compensation [is] often the single largest expense item" for businesses, he said. In uncertain economic times, "more senior leaders are asking how do we get the most out of this investment and how do we use it as a tool to manage the business," he said.

That's where variable-pay programs come in. They are "a way to deliver those funds without making that long-term commitment [to a fixed salary] -- and it requires the employee to perform," said Alison Avalos, a practice leader with WorldatWork, a Scottsdale, Ariz.-based association of human-resources professionals.

The uncertainty makes employees nervous, said Ken Abosch, a compensation practice leader with Hewitt Associates. Who doesn't like the certainty of fixed salary? With bonus pay, "when results are there, the company pays out. When they're not there, they don't," he said. But, he argues, bonuses offer "an upside potential that employees don't have with base salaries," he said.

On average, hourly and professional technical employees can expect employers to dole out bonuses of between 5% and 10% of base pay, entry-level professionals and midlevel managers, 10% to 20% of pay, and senior managers through executives, anywhere from 20% to 80% or higher. But of course, that pay is targeted to top performers.

Pressure cooker
The projected salary increase for 2008 is "very mild growth," said John Irons, director of research and policy at the Economic Policy Institute, a liberal think tank. And surprisingly mild when you consider how robust productivity gains are: U.S. nonfarm workplace productivity jumped at an annual rate of 4.9% in the third quarter, the fastest growth in four years, the U.S. Labor Department reported in November.

"We would hope for wages and salaries to increase with productivity growth...but we see productivity growth is stronger while wage growth is weaker," Irons said.

Why the pressure on wage growth? Some factors often posited include competition from foreign labor, immigration, a decline in unions' bargaining power and the workplace's technological changes. "There are a lot of explanations out there, but there is clearly no single explanation," Irons said.

Irons does say a weak labor market is playing a role in anemic wage increases.

"The strongest income growth is when labor markets are really tight. The late 1990s are a great example. Employers were scrambling to find workers, and you saw big signing bonuses," Irons said.

Back then, 300,000 new jobs created per month was seen as decent job growth. These days, many experts celebrate 150,000 new jobs created and job gains of less than 100,000 have been posted in recent months, Irons said. And, while the unemployment rate is relatively low at 4.7%, it doesn't capture people who are not in the labor force.

"The overall labor market is really creeping along much slower than we'd like."

Some enjoy bigger increases
Employers' expected 3.9% salary-budget increase for next year is an average. That means the news is much better for some than others.

A top performer "might get 8%, but the laggards might get zero or 1% or 2%," Jesuthasan said.

Average salary hikes for executives will be slightly higher than those for lower-level workers next year, continuing a trend evidenced this year, when executives enjoyed increases topping 4% on average for the first time in six years, according to WorldatWork's survey of more than 2,500 North American companies and agencies.

Also, workers at smaller companies enjoyed bigger increases, with companies with fewer than 500 workers reporting a higher salary budget increase this year -- 4.1% -- versus a 3.7% increase at firms with more than 20,000 workers, according to WorldatWork's survey.

The Economic Policy Institute has found that higher-income people are enjoying bigger salary hikes in recent years, Irons said. "The average increase is somewhat misleading because you're averaging high-income people who have done very well recently with middle- and low-income people who have done very poorly," he said.

Go ahead and ask
The best companies tell employees, at the beginning of the year, what they need to do to earn a bonus, but plenty of firms fail to do that, Abosch said.

"It can never hurt to ask and to try to get a little more clarity, particularly at the beginning of the year when you're having other performance-goal conversations, to say, 'am I eligible for a bonus? What would I need to earn one? Give me an idea of how much I can expect?'" he said.

"That's going to make some supervisors and managers uncomfortable, but employees should feel like they can ask that question to understand the overall employment deal."