Salary increases over the past five years have been
steady at roughly 3% per year, even as inflation has varied considerably over
the same time period. Although companies have raised merit budgets compared to
the recession years of 2009 – 2011, pay changes have not recovered to
pre-recession levels. Prior to the recession, salary budget increases ranged
from 3.8% to 4.6% during 1999 – 2008 (World at Work Annual
Salary Budget Surveys).
Are there reasons to believe that 2019 may finally be
different? A recently published World at Work survey of salary increases projected
that the average salary increases across all employee types will be 3.2% for
2019. It is worth noting that while this survey had a robust data set of about
5,500 submissions, the survey closed in May 2018. This means that participants
in the survey were estimating their 2019 increases well in advance, and the
actual pay changes may be different, as there is still a lot of time remaining
in 2018.
In spite of near record low levels of unemployment
and the recent passage of sweeping tax reform, projected pay changes for 2019
are not all that different from the 3.1% average increase that workers received
in 2018. Inflation rates are on an upward trend in recent years, so the real
annual pay increases when inflation is factored in are quite small. In fact,
the inflation rate for the 12 months ended in June 2018 was 2.9%, so when compared
to 2018’s average pay increase of 3.1%, that comes out to a real pay increase
of just 0.2%.
The table below shows the average pay increases for
each employee type since 2009 compared to annual inflation levels:
Sources: World at Work
Annual Salary Budget Surveys 2009 – 2018 and the Bureau of
Labor Statistics
The
chart above shows a graphical comparison of salary increases to
increases adjusted for inflation. Salary increases have shown little variance
over the decade, hovering near 3%. When salary increases are adjusted for
inflation, a totally different picture is shown. Real pay increases (after
adjustment for inflation) have actually been closer to 1% with a few
exceptions. It is worth noting that in 2011, the real pay increase was actually
-0.4%, which means that many workers’ buying power diminished, despite
receiving a pay increase.
Decade
|
Average Real Salary Increase
|
1980s
|
2.12%
|
1990s
|
1.47%
|
2000s
|
1.22%
|
2010s
|
1.16%
|
The table to the left
shows that real pay increases over the last decade have been quite low relative
to historic levels. The Economic Research Institute (ERI) recently posted an analysis of how real salary
increases have varied over the past several decades, calculated as the
percentage of salary increase budgets less the percentage change in the CPI
through 2016. The results show that real pay increases have been declining, and
are down nearly a full percentage point since the 1980s.
If pay raises aren’t
doing much to outpace inflation, workers may view their compensation packages
as stale and may seek better pay elsewhere — especially during periods of low
unemployment. A May 2018 survey of over 1,000 workers in sales, office,
management and professional occupations by Accounting Principals and Ajilon
Research & Insights found that 43% of respondents would be enticed to leave
their company if offered better pay by another company. Perhaps unsurprisingly,
the survey found that workers aged 18 to 25 were most likely to leave for
increased pay, while those over 55 were the least likely. Additionally, the
unemployment levels for professional and managerial employees are low compared
to other employee classifications, which suggests that these positions have
ample opportunities to change jobs for better pay opportunities.
Current unemployment
levels are quite low, no matter which measure is used. According to the Bureau
of Labor Statistics, the June 2018 U-3 (official unemployment rate) was 4.0%,
while the U-6 (sometimes called the “real” unemployment rate) was 7.8%. In
addition to metrics like the U-3 and U-6 unemployment rates, other metrics
point to a tight labor market. In May 2018, the number of job openings was
greater than the number of job seekers for the first time ever, with a ratio of
0.9 unemployed workers per job opening.
While
pay increases in 2019 are projected to be the largest in the past decade, they
are only slightly larger than in 2018. With low unemployment levels and the
possibility that upward trends in inflation continue through the remainder of
2018, there are reasons to speculate that pay increases may be greater than the
early survey results would indicate. We would not be surprised if pay increases
for 2019 end up being at or above 3.5%, rather than the 3.2% indicated by the
World at Work survey.
Pay Strategies for Companies Going Forward
Companies
may consider different approaches as the pace of compensation changes picks
up.
1.
Employers should consider potential
wage changes differently for different segments of their workforce. The historical data suggests that higher-paid
jobs have seen greater pay increases than lower-paid jobs. Whether this is a socially appropriate
strategy is a separate question.
2.
Track new hire rates in comparison
to wages paid to current employees. You might see signs of increasing wages
that should be reflected in next year’s merit budget. There are a few software
programs such as PayFactors that can provide more current pay data than salary
surveys.
3.
Companies should ensure their salary
management systems are externally competitive. No organization wants to lose
its high performers to competitors because its pay isn’t competitive with the
market. Target your high performers for higher increases.
4.
This is a great time for companies
to consider a variable or incentive pay plan to complement their base pay
programs. Utilizing incentive pay has the advantages of not increasing fixed
costs and ties potential rewards to desirable business outcomes.
5.
Although competitive
wages are certainly an important reason employees remain with organizations,
they are not the only reason. Companies should consider enhancing their efforts
in career growth and performance management, building an engaging company
culture, and providing work/life balance.
These factors are most significant in retaining employees.
