Q. You’re predicting a growth in compensation in 2011. Why is that? How does this compare with recent years and what does the growth mean?
A. The economy has stabilized to the point where most companies now feel comfortable budgeting salary increases for their employees, increasing their fixed costs. In 2009 and 2010, salary increase budgets at many companies were either significantly smaller than the historical 3 percent to 4 percent average or nonexistent. More than 50 percent of companies had some type of pay freeze during that time in order to conserve capital and protect their balance sheets. The growth in fiscal 2011 means that companies now have enough confidence in their financial forecasts to again be growing their salary expense lines. This is a positive sign for growth of the overall economy.
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Q. It looks like the executive sector fares best with increases of 2.7 percent with exempt and non-exempt getting 2.5 percent. It’s a minor difference but is it an indication of more efforts at retention at the executive level?
A. I don’t believe that is the case. Executive salary budget increases typically have a modest premium relative to other employee populations. This is simply a return to the historically prevalent practice. That said, one of the key concerns organizations have had with low (or no) salary increase budgets is their ability to retain their best talent across all employee segments. You can be sure that companies will be looking to address this with the funds they have available.
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Q. Looking back at 2010, salary-increase budgets for exempt and non-exempt employees were approximately 10 percent lower than estimates. Why was that?
A. In the fourth quarter of 2009, the time when companies project salary increase budgets, companies were unsure of the magnitude and pace of a prospective economic recovery. There were concerns of a “double-dip” in the equity markets, insufficient liquidity in the credit markets, and subpar business and consumer spending. When organizations budget salary increases, they do not have to spend all the resources they budget. Conversely, organizations typically cannot spend more than what is budgeted. As such, we believe organizations left themselves with flexibility and budgeted salary increases they ultimately did not spend.
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Q. Industries with the lowest actual salary increase budgets and range adjustments were education, information services/telecommunications, and transportation. Do they continue to lag behind going forward in 2011? Why?
A. For fiscal 2011, the Education and Transportation industries again forecast to be on the lower end of salary increases. Information services / telecommunications forecast to be on the higher end. Different industries recover from economic recessions at different paces due to a variety of reasons. In the cases of Education and Transportation, these industries tend to generate revenue from discretionary consumer spending and are typically “big ticket” items. Furthermore, these industries often rely on public sector (i.e., governmental) support either through direct funding or as a consumer. Conservative consumer spending and the pressure on public sector budgets may be negatively affecting these industries financial forecasts, which in turn will lower salary budget increases.
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Q. Industries with the highest actual salary increase budgets were manufacturing and utilities, yet increases were only modestly above the cross-industry average. How will they fare going forward in 2011? Why?
A. Both Manufacturing and Utility salary increase budgets approximate the cross industry average for fiscal 2011. On the whole, these industries project fiscal 2011 financial results substantial enough to justify increasing fixed wages between 2.5 percent to 3 percent.
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Q. In an article you wrote, you suggest bonuses as an approach to pay differentiation. Why is pay differentiation important? How do bonuses help achieve it?
A. Companies differentiate compensation to recognize their best performers. Differentiating rewards is important because investments in top talent tend to produce better returns than similar investments in other employees. These returns can take many forms including productivity, quality, speed, business plan execution, innovation, leadership, and retention (to name a few). Bonuses can improve overall pay differentiation because they increase the available pool of dollars for investment. For example, consider an employee who makes $80,000 with a target incentive of 15 percent. If the salary increase budget is 3 percent and the bonus pool is funded at target, $2,400 is budgeted for the salary increase pool while $12,000 is budgeted for the annual incentive pool. Because the magnitude of the dollars is typically higher for incentives, there is greater ability to use that as a tool to differentiate pay-for-performance
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