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 ).
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:
–
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%
|
nomic Research Institute (ERI) 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.
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.
Dan Steele and Joe Kager of the POE Group.