Salaries Looking Slightly Higher for 2011

Most companies plan to modestly hike base pay for workers, with differentiated levels for the various types of performers. In addition, most compensation surveys find that few companies plan to freeze salaries next year. But uncertainty about the economy remains.

By Maura C. Ciccarelli

It's not quite break-out-the-champagne news, but you could be forgiven for cracking open a nice, cold microbrew, instead.

Four recent surveys -- by Mercer, Towers Watson, Hay Group and WorldatWork -- are reporting increases in average base salaries and a return of variable pay programs for 2011.

Most predictions are modest -- between 2.5 percent and 3 percent, compared to a 2010 average of 2 percent to 2.7 percent -- and bonus pools are increasing, but are still limited. However, both strategies are being deftly used to reward top performers, while not committing to increased budgets if boom times aren't in the offing.

Mercer's 2010/2011 U.S. Compensation Planning Survey reported that nearly all (98 percent) of the 1,110-plus companies polled plan to award base pay increases in 2011. Just 2 percent of companies planned for salary freezes.

Freezes were more common in 2010, with 13 percent of companies imposing them, and even more, 31 percent, in 2009.

Towers Watson, which surveyed more than 1,000 U.S. companies, was slightly more pessimistic, with a 5-percent planned freeze rate in 2011, although that is a big turnaround from its 2009 finding of a brutal 32-percent freeze rate.

Towers' respondents were also more pessimistic about raises in 2009, with the survey finding companies only planned a 1.6 percent average increase.

Mercer and Hay's respondents were the most positive for the coming year, with an average of 2.9 percent and 3.0 percent salary increases, respectively.

Towers and Mercer reported that the highest paying employees are expected to see an average pay increase of 4.3 percent, while average performers would get 2.6 percent, and weakest performers only 0.5 percent (Mercer) and 1.4 percent (Towers).

"For the average employee, this means its good news," says Laura Sejen, global rewards practice leader at Towers Watson in New York. "For a better-performing employee, a 4.3-percent increase is even enough to notice the difference in their paycheck."

WorldatWork's 37th Annual Salary Budget Survey tracked similar figures across the globe, with poorer performers receiving 0.7 percent or nothing at all; middle performers at 2.4 percent, and high performers at an average of 3.7 percent.

Employers polled by WorldatWork reported that about one-quarter (24 percent) of employees are rated as high performers, while most are classified as middle performers.

"With underfunded salary budgets this year, employers want the most bang for their buck," says Anne C. Ruddy, president of WorldatWork, based in Scottsdale, Ariz. "They are no longer averse to withholding merit increases for poor performers so they can afford to grant meaningful increases to better performers."

Hay's salary retrospective in its report offered an illustration of the past 10 years, with the beginning of the decade showing increases tracking at 4.5 percent and 5 percent, declining to a steady 4 percent from 2005 to 2008, and then a precipitous drop to 2 percent in 2009.

While the 3-percent projection is up slightly for 2011, it indicates companies are turning to the paycheck as incentive again -- but not too much.

"I don't think that employers are looking to open the floodgates to raise base pay that much," says Mel Stark, vice president and northeast regional reward practice leader for the Hay Group's Metro New York office in Jersey City, N.J.

The modest increases are akin, he says, to the "safe" musical-chairs strategy of keeping one hip on each chair as you pass by in case the music stops.

Sejen of Towers Watson agrees about the uncertainty.

"There's a never-ending stream of economic forecasts, literally from one day to the next. Unemployment is up, unemployment is down, we're having a double dip or we're no longer worried about a double dip. No one's got the perfect crystal ball on this. ... As an employer, you have to position yourself as carefully as possible in a volatile environment for a while and don't commit to investments and rewards that you can't meet six to 12 months from now," she says.

It is a delicate dance HR strategists are performing, says Catherine Hartmann, a principal with New York-based Mercer's rewards consulting business. "The people who are left currently employed are typically those who have gone maybe two years without an increase and who have been leaned on pretty heavily to remain productive. If the company has had layoffs, those who are left were above average performance."

As a result, she says, employee-engagement levels are "basically in the toilet;" salary increases are being used to help retain and reward top performers. Also, some companies, she says, are reinstituting 401(k) matches and, more informally, work/life balance programs.

Stark says the recession has forced many companies to look beyond compensation as a performance-management strategy, as well as explore non-monetary incentives such as career development and training.

"Lots of systems have inertia and are managed the same way over and over again. You don't often get the opportunity to recast things," he says. "The recession was the perfect opportunity. If you were working, you were definitely a captured population; people were open to a different kind of listening [to what was going to change and why]."

Bonus programs are returning, if modestly. Mercer's survey showed that short-term incentive payouts as a percentage of base pay will rise from a projected 10 percent in 2010 to actual payout of 12 percent for this year.

Hartmann of Mercer and Sejen of Towers Watson note that bonus programs are being more firmly linked with hard financials, rather than softer metrics such as customer service.

Once a compensation strategy has been developed, it's time to communicate it to employees, and Hay reports that organizations are paying more attention to that issue.

Nearly six in 10 (58 percent) of companies are changing the way they convey reward programs. The same percentage believe their variable-pay programs are actually understood by employees and just one-third (34 percent) believe such programs are communicated effectively by line managers.

The differentiating performance levels for bonuses and base-pay increases can be difficult to design and difficult to sell to employees, says Hartmann.

"If the company performance is there," says Hartmann, "how do you explain to managers who have the top people left in the department that they have to differentiate among the people who have been basically pulling for [the managers] in the last two years?"

That may be when communication and corporate culture take precedence.

"Cash is important," Stark says, "but we know that there are companies that do a much better job of creating a better environment that encourages people to stay and add discretionary effort. If you can win the hearts and minds of those folks, they will do more and a better job for you."

And that really affects the bottom line.