Despite historically low levels of unemployment and high demand for labor, salary budget surveys for 2018-2019 suggest that US wages will grow on average by just about 3 percent both this year and next year, continuing a trend of lackluster raises despite labor market conditions that theoretically should push earnings higher. The WorldatWork 2018-2019 Salary Budget Survey projects a mean average wage growth of 3.2 percent and a median 0f 3.0 percent next year, little changed from 3.1 percent (mean) and 3.0 percent (median) in 2018.
Employers are continuing to devote a significant share of their salary budgets to variable pay, WorldatWork found, but these budgets also aren’t growing, SHRM’s Stephen Miller observes:
Some 85 percent of U.S. employers gave out performance-based bonuses or other forms of variable incentive pay in 2018, the survey shows, and the amount of variable pay budgeted and paid out, for all employee categories, has been stable for several years. When total rewards professionals were asked about their variable pay budgets for 2019, their responses were virtually unchanged from the amounts budgeted for this year and … for 2017.
Alison Avalos, director of membership and total rewards strategy at WorldatWork, tells Miller that one reason why these budgets aren’t increasing is that employers are increasingly using benefits to attract and retain talent instead of cash rewards, including intangible benefits like professional development opportunities and purpose-driven organizational cultures that align with employees’ personal values.
Similarly, Willis Towers Watson’s 2018 General Industry Salary Budget Survey finds that US professionals can expect raises of 3.1 percent on average next year, compared to 3.0 percent this year. Wage growth has leveled off at around 3 percent per year over the past decade. Their survey also found that star performers would once again see higher increases next year, and registered a slight increase in budgets for discretionary bonuses:
The survey also found companies continue to reward their “star” performers with significantly larger pay raises than average performing employees. Employees receiving the highest possible rating were granted an average increase of 4.6% this year, 70% higher than the 2.7% increase granted to those receiving an average rating. …
Indeed, the survey found companies are projecting discretionary bonuses — generally paid for special projects or one-time achievements — will average 5.9% of salary for exempt employees, slightly larger than companies budgeted for this year. Slightly larger discretionary bonuses are planned for managers and salaried, nonexempt employees. Annual performance bonuses, which are generally tied to company and employee performance goals, are projected to hold steady or decline slightly in 2019 for most employee groups.
Mercer’s 2018/2019 US Compensation Planning Survey finds US salary budgets growing at an even slower pace, with a flat increase of 2.8 percent this year and projecting only a 2.9 percent raise in 2019. This lackluster wage growth despite a tight labor market indicates a fundamental problem in organizations’ compensation processes, including those for incentive pay, Mercer’s Lauren Mason and Mary Ann Sardone argue in a blog post:
Historically, annual salary increases were promoted as “merit budgets” to highlight pay for performance. Market pressures drove the need to balance pay for performance with market competitiveness. Today, the common practice of slicing a budget of 3% by these two dimensions is failing on both fronts: internal pay is falling behind market and premiums for high performance are menial.
Many organizations are considering other levers to differentiate performance– particularly incentive pay and career advancement through more meaningful promotional increases. Unfortunately, Mercer’s … survey shows that the average promotional increase offered for employees in 2018 was only 7.8%, up slightly from 7.5% in 2017.
To more effectively compete in the talent market, Mason and Sardone suggest that employers offer “more aggressive promotional increases that align with what employees can get outside your company,” focus more efforts on pay equity and transparency, and explore strategies for differentiating with emotional and experiential rewards.
The massive corporate tax cut passed last December does not appear to be having much effect on salary budgets: Mercer found that only 4 percent of employers were planning to invest their tax savings in salary increase budgets for 2019, and half of those said this increase to be less than 1 percent of payroll. The salary increases this year fell short of the 4.27 percent CEOs and CFOs predicted in a business confidence survey in late 2017.
These new surveys’ findings with regard to performance-based pay are similar to what they predicted last year for 2018. Those prediction have played out as expected, with high performers receiving higher raises than their average peers this year. This points to a continuation of the trend away from flat annual raises and toward more variable, incentive-based compensation structures. Employers see additional value in variable pay because it tends to be more effective at motivating performance and because performance-based bonuses don’t lock the organization into paying an employee a higher salary in perpetuity.
Pay differentiation is important to create an incentive for employees to reach for high performance goals. In our research at Gartner, we’ve found that average performers actually don’t mind if their high-achieving colleagues earn greater rewards than they do. They are discouraged, however, when their own pay isn’t differentiated from that of low performers, so the most effective variable compensation schemes find ways to make solid performers feel rewarded and appreciated, as well as stars. Gartner Total Rewards Leadership Council clients can learn more about how to reward employee performance here.