Study Suggests Employers to Shift Bulk of Pay Raises to Top Performers

Sarah E. Needleman

Low-performing employees -- from executives to entry-level workers -- likely won't see their paychecks rise much next year. But for high performers, raises will remain in line with 2008 increases as employers intensify the trend of reserving the bulk of pay raises for top talent.

"Companies are trying to use their money more wisely," said Steve Gross, a global practice leader at Mercer LLC, a New York human-resources consulting firm, which released its annual U.S. compensation report Thursday.

In the past, subpar workers might have expected to see a salary increase just below the average raise. But Mercer's study suggests that employers are shifting what little they have to offer in the way of merit raises to their top performers.

Mercer looked at pay practices for more than 12 million employees at 1,039 midsize and large U.S. firms with average annual revenue of $5.9 billion. Employers said they plan to give their highest-rated workers -- an estimated 14% of their work forces -- an average merit increase of 5.6% in 2009. The lowest performers, who represent 7% of workers, are likely to receive just a 0.6% salary upgrade.

Top performers are likely to receive higher bonuses this year, too. For executives in this category, the payouts in 2008 are estimated to be 66% of their base pay, and for managers, 36%. By contrast, low performers are likely to receive bonuses of 20% for executives and 8% for managers.

In general, workers overall are likely to receive slightly lower salary increases next year, the study shows. The average raise for all workers is expected to be 3.7% in 2009, compared with the 3.8% they received in 2008. Executive-level employees are projected to fare better, with their salaries rising on average 3.9%, Mercer reports.

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The projections are slightly more promising than those in a report released last month by consulting firm Watson Wyatt Worldwide Inc., which found that employers are expected to boost base pay by an average of 3.5% next year. Another study, due out later this month from consulting firm Hewitt Associates Inc., suggests this figure will be closer to 3.8%.

With the inflation rate expected to remain high -- upwards of 3% in 2009, by some estimates -- the average person might not feel much of a boost to his wallet. Instead, increases in the cost of everything from gasoline to groceries are likely to eat up most of the gains, said Kenan Abosch, North American compensation practice leader at Hewitt. "Most employees this year will feel a crunch between the income they're taking home and their daily expenses," he said.

At the same time, incentive-based payouts tied to performance are becoming more common. According to Mercer's study, 86% of organizations give workers bonuses, and since 2005, 23% have increased the number of those eligible per level along the corporate ladder. Further, 24% of organizations reported they have extended bonuses to workers at more levels.

In addition to these bonuses, the number of employers offering referral bonuses to workers has more than doubled in the past three to five years. And employers said they still will dole out one-time cash awards to employees who exceed expectations or achieve a major milestone, according to Mercer's study.

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Cash awards typically are given out on the spot, which is particularly effective for motivating workers to achieve better results, said Brooks Holtom, assistant professor of management at Georgetown University's McDonough School of Business. "The closer the reward is to the actual performance, the stronger the reinforcing effect," he said.

Hewitt's Mr. Abosch said he is surprised so many companies are sticking with bonus payouts. "If we're in an economic downturn and company performance is down for a lot of organizations, funding should also be down for a lot of bonus programs," he said. Employers may be giving out bonuses anyway, "because they're worried about morale and turnover."

Mercer's study also shows differences in average merit increases for employees depending on the industry in which they work. Those in the oil and gas sector, business-process outsourcing, and business and professional services are expected to gain average increases of 5.0%, 4.7% and 4.2%, respectively. Workers employed in banking, education, durable goods and retail are anticipated to receive increases of about 3.5%.

Write to Sarah E. Needleman at