Inflation May Offset Pay Increases in '09

Sarah E. Needleman

Despite the weak U.S. economy, employers nationwide are expected to raise workers' salaries next year at the same rate as they did this year, a new survey shows. But the increase may be offset by rising inflation rates and lower 2008 bonuses tied to company performance.

Rank-and-file workers can expect to see their base pay rise by an average of 3.5% in 2009 -- the same amount they received this year, reports Watson Wyatt Worldwide Inc., a global human-resources consulting firm. High performers are projected to fare better, gaining an average of 4.4% in base pay, while mediocre performers are likely to see their paychecks increase by 2% or less.

In May, Watson Wyatt, based in Arlington, Va., surveyed 1,389 companies with 250 or more employees, 276 of them in the U.S., in a wide range of industries.

But even with a 3.5% raise, most workers will likely find that extra cash consumed by rising costs for everything from food to gasoline. The latest report from the U.S. Labor Department showed inflation rising at a brisk 5% in June -- more than the raise most employees will receive in 2009.

"Inflation has crept up to a pace where even your better-performing employees won't make up the difference," says Laury Sejen, global director of strategic rewards consulting at Watson Wyatt. "They're going to be losing ground relative to inflation."

Workers in critical and difficult-to-fill positions may be an exception. Employers who must retain talent are likely to offer those workers higher salary increases, says Steve Major, a business-unit president at CBIZ Inc., a consulting firm based in Cleveland. "Wages will take off if there's any kind of competitive pressure for employees," he says. What's more, he says, expanding industries also are likely to boost salaries above others.

Starting base salaries for finance directors at companies with annual sales of $100 million to $250 million rose 5.5% in 2008, reports Robert Half International Inc., a global staffing firm based in Menlo Park, Calif. And another study by the firm showed that 56% of 4,000 hiring managers surveyed were having trouble filling accounting and finance jobs.

Other sectors in which hiring and salary competition is robust include health care, government and education, according to a recent report from the Labor Department.

Even in the tight economy, Ms. Sejen says she isn't surprised by the Watson Wyatt findings that most employers are still planning to increase wages in 2009. "There's a very strong, built-in, almost entitlement mentality surrounding the annual merit increase within American businesses," she explains.

Reducing workers' annual pay increase could also jeopardize employers' ability to retain talent, says Robert Trumble, professor of management at Virginia Commonwealth University and director of the Virginia Labor Studies Center in Richmond. "We can't get too far behind inflation because employees get upset," he says. "Human nature is such that we're willing to stay as we are, but we're very reluctant to move back, and all employers know that. It's why very rarely you see pay cuts."

But those cuts could happen should the economy suffer a major blow down the road, the Watson Wyatt survey suggests. Two-thirds of respondents said they have formal plans in place to protect themselves in the event of future economic downturns. And while slightly more than half of those plans involve laying off workers, 27% said they would enforce smaller salary increases and an additional 13% said they would freeze wages.

Another downside for workers: Bonuses tied to company performance will likely be significantly less this year than last, says Mr. Trumble. "Bonuses are definitely going to be down," he says. "The economy as a whole is down and most [bonuses] are performance-related."

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