The latest salary planning survey from Aon Hewitt finds that most US organizations plan to keep wages relatively flat for most employees in 2018, with base pay increases averaging 3 percent and spending on bonuses and other variable pay declining to 12.5 percent of salary budgets, the lowest since 2013.
“The economic outlook for most industries continues to improve with increased demand for goods and services and stronger job creation, but companies remain under pressure to increase productivity and minimize costs,” Ken Abosch, broad-based compensation leader at Aon, said in a press release. “As a result, we continue to see relatively flat salary increase budgets across employee groups, with most organizations continuing to tie the majority of their compensation budgets to pay incentives that reward for performance and business results.”
Two-thirds of organizations are increasing the differentiation of their merit pay in 2018, Aon finds. Among those employers, 40 percent are reducing or even eliminating raises for low performers, 18 percent are using a more highly leveraged merit increase grid, and 15 percent are setting more aggressive performance targets.
In part, the findings reflect uncertainty about the economy’s trajectory, “Organizations are expressing reservations about the years coming and, for the first time since the recession, are signaling doubt or uncertainty about what they think their performance will look like in the coming year,” Abosch tells the Wall Street Journal’s John Simons.
Washington Post columnist Jena McGregor notes the dissonance between Aon’s low base pay projections and the overall strength and tightness of the labor market, which economists would normally expect to push wages upward. But as Abosch explains, the traditional 4 or 5 percent annual raise is no longer the standard it once was:
As companies have shifted more resources into paying out bonuses and merit increases rather than standard pay bumps, aiming to differentiate even more between top performers and middling workers, 3 percent has become “the new 4 percent,” Abosch said. In addition to believing that differentiated pay helps incentivize employees to work harder, employers have been favoring bonuses or additional perks because they act as a “relief valve,” something that’s far easier to cut than base pay, which becomes a fixed cost.
The shift toward focusing more heavily on performance pay reflects a long-term trend in which companies are finding targeted incentive raises more valuable drivers of performance than the traditional annual raise. This was reflected in Willis Towers Watson’s 2018 salary survey as well, which found that 98 percent of employers plan to raise salaries next year by an average of 3 percent, but star performers’s salaries are expected to increase by 4.5 percent on average. WorldatWork’s survey also calculated an average raise of 3.2 percent, in line with recent years.
We’ve seen this shift in rewards strategies developing over the past few years, with rewards consultants recommending that companies decrease the use of across-the-board annual raises and adopt more differentiated pay strategies, which other studies, including our own research at CEB, now Gartner, have shown to be more effective motivators of employee performance. Some employers are making up for the stagnation of average employees’ pay, however, by investing more in benefits like health insurance, wellness plans, and retirement savings.
Of course, rewarding only high performers also carries risks, especially in a tight talent market where even average performers could be hard to replace if they decide they are unhappy with their compensation. Indeed, some employers have bucked the trend and moved in the opposite direction, whether in the interest of equalizing pay within their organization, or to avoid incentivizing short-term thinking.
As an example of this counter-trend, the Journal’s Simons points to AppNexus, a New York-based advertising technology company that removed its bonus plan for employees below director level last year and shifted those funds into base pay raises for those employees. AppNexus’s chief legal and people officer Nithya Das explains to Simons that the previous plan had become ineffective at motivating performance.