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Why you probably won’t get a raise this year

Rick Newman
The Exchange

Wishful thinkers have been hoping 2014 will be a year of fatter paychecks. After all, corporate profits are strong, unemployment is falling and the economy seems to be recovering for real.

Reality is harsher. While most companies are in good shape, there is still so much slack in the job market that few workers have the leverage to demand much of a pay increase. And while companies are paying up for a few highly skilled employees, most firms still have a relentless cost-cutting mentality. “There’s never been less pressure on employers to give raises at the same time there’s so much pressure to control costs,” says Dave Van De Voort, a principal with Buck Consultants. “Employers have learned they can squeeze more and more out of their workforce.”

Workers can be forgiven for thinking a raise is in the offing. A variety of surveys show that companies plan to raise pay by 3% to 4% this year, which would be a considerable improvement over the recessionary years of 2008 and 2009. Compensation-research firm Payscale found that 57% of firms are worried about losing key employees this year — a key reason to grant raises — compared with just 20% of companies that felt that way in 2010. And CEOs have been setting an enviable standard through their own pay raises, which averaged 4% during the most recent year —  or about $350,000, at that rarefied level.

A misconception

The misconception is that most workers will get a raise, the way it used to be before the recession decimated payrolls. But things have changed. While the typical company may be able to boost its compensation spending by 3% this year, companies are giving larger raises to their most valued workers, while giving small raises — or none — to those in the middle. “Organizations are getting better at distinguishing performance and they’re spreading more money among top performers,” says Cathy Shepard, a principal in the talent practice at Mercer. “If you only have a 3% budget, you have to give someone 0 to give someone else 6%.”

Companies seem to be anticipating a renewed “war for talent,” with employers battling each other to nab the best workers in a variety of fields — which, in theory, ought to be pushing pay up. Except for well-known specialties such as engineering and other math- and science-related fields, however, demand for workers remains tepid. The “quit rate,” for instance — which measures the portion of workers who leave their jobs each month, usually because they find a better job — dropped from 2.1% before the recession to 1.2% in 2009. It’s been rising since then but is still only at 1.7%, or about halfway back to normal.

Rising incomes, in fact, are perhaps the biggest missing piece in an incomplete recovery. Disposable income per person, adjusted for inflation, has risen just 2.7% during the past three years, or less than 1% per year. Weak income growth is the starting and ending point of a troublesome cycle: Depressed incomes hold back consumer spending, which in turn limits demand for goods and services at companies, leaving them no reason to hire or boost pay. Most companies these days are juicing profits by cutting costs, not by adding revenue. Until business picks up substantially, weak revenue growth will keep a lid on hiring, perpetuating an oversupply of labor in many industries and keeping pay down.

The surest way to earn a raise is to get a promotion, yet companies even seem to be cutting back on those. Buck’s compensation outlook for 2014 found “promotion opportunities tapered off” in 2013, and “the size of promotional pay increases declined.” The outlook appears dismaying: “Projections for 2014 suggest that the economy will be even more difficult for both employees and employers than the considerable challenges faced during the last several years.”

Not all bad news

Not all the news is terrible. With payrolls lean, reported layoffs in 2013 were at the lowest level since 1997, according to outplacement firm Challenger, Gray & Christmas. That gives workers better job security, even if they lack income security. And with all the cost-cutting of the past several years, many employers are poised to boost pay and hire more once business picks up.

To become one of the happy few who do get a raise in 2014, compensation experts say it’s critical to align your professional interests with those of your employer and be able to show how you contribute to the bottom line. Your boss needs to be on your side, and it certainly helps to have higher-ups who can advocate on your behalf as well.

Workers should also understand that the bar for measuring performance at many companies is getting higher. The layoffs of the past few years tended to push the weakest performers out the door, leaving a remaining pool of more-qualified workers. So the competition for raises effectively got tougher. That makes it more important than ever to be able to document your own contribution to the company, in terms that correspond to the company’s own performance standards.

What doesn’t work is complaining that you “deserve” a raise, whether because you’ve too gone long without one or you’ve simply been working hard. “Corporate performance has been good,” says Van De Voort, “but the way we’re all contributing to that is through lower labor costs. That’s not a good place to be in.”

Complaining about that won't make it better. Proving how you help your employer meet its own goals might.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.