As base pay increases remain stable for 2007, more companies are relying on variable pay - performance-related awards that must be re-earned each year - to attract, motivate and retain employees. Skyrocketing energy costs, rising medical costs and interest rate-related expenses continue to have the potential to offset salary gains for workers, but many could make it up with variable pay bonuses, according to Hewitt Associates, a global human resources services company.
Hewitt's survey of 1,028 large organizations representing almost 500 million employees reveals that salaried exempt employees(1) can expect base salary increases of 3.7 percent next year, the highest increase in five years but only a modest increase from this year's 3.6 percent. Executive employees are projected to receive 2007 increases of 3.8 percent, compared with 3.6 percent for salaried non-exempt(2) and non-union hourly, and 3.3 percent for union employees.
"In today's competitive global economy, companies are unwilling to increase costs to their bottom line; therefore, they are relying more on variable pay to help motivate employees and help them cope with growing economic pressures," said Ken Abosch, a business leader for Hewitt Associates. "Variable pay programs allow companies to manage fixed costs, create focus on key business objectives, motivate and reward employees with bonuses when performance goals are attained. The bottom line is that variable pay is a smarter way to manage a business in a good or bad economy."
Variable Pay Needs to Pick Up Slack Where Salary Increases Remain Flat
Variable pay can help make up where base salary increases fall short of expectations for many employees. Hewitt's survey shows that employers are relying more on bonuses as a primary means of attracting, motivating and retaining key talent.
In 2006, actual company spending on variable pay as a percentage of payroll is 11.2 percent, more than three times the 2006 average base pay increase. Spending on variable pay in 2007 is projected to remain strong at 11.0 percent. Variable pay has grown in prevalence since the early 1990s, with 80 percent of responding companies currently offering at least one type of broad-based variable pay plan, compared with 51 percent in 1991. According to Hewitt's study, special recognition awards(3) are the most common award (63 percent), followed by business incentives(4) (62 percent), signing bonuses (62 percent), individual performance awards(5) (44 percent), non-executive equity awards(6) (44 percent) and retention bonuses (35 percent).
"Variable pay is a win-win as employers can manage their costs and reward employees, and, at the same time, motivate and drive business results. Employees like variable pay programs because there is a tremendous upside and they feel like they have more control than they do in earning base salary increases," explained Abosch. "The key to an effective variable pay program is to create meaningful goals and to effectively communicate the program to employees. Employees should also make sure they understand their manager's expectations, get as specific as possible about measuring results, and ask for performance updates throughout the year."
2007 Salary Increases by Industry and City
Hewitt's study shows that salaried exempt workers in some major U.S. cities and industries should realize salary increases somewhat higher than the national average projections for 2007, including Houston (4.7 percent), Washington D.C. (4.5 percent), Denver (4.4 percent), Los Angeles (3.9 percent), Atlanta (3.8 percent) and San Francisco (3.8 percent). See attached chart for more information.
The industries experiencing above-average salary increases include energy (4.5 percent), construction/engineering (4.1 percent) and aerospace (4.0 percent). The lowest industry average salary increases are projected to be computers and related products (3.2 percent), metals (3.2 percent), forest and paper products/packaging (3.3 percent), rubber/plastics/glass (3.3 percent), education (3.3 percent) and entertainment/communications/publications (3.4 percent).
Other key survey findings:
-- Companies reported a 15.7 percent average turnover(7) rate in the past 12 months.
-- Attraction and retention continue to be a sore spot for a number of companies with 37 percent reporting problems.
-- Less than 2 percent reported a salary freeze for 2006, and less than 1 percent expect a salary freeze in 2007.
About Hewitt Associates
With more than 60 years of experience, Hewitt Associates (NYSE:HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,400 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 350 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 22,000 associates. For more information, please visit www.hewitt.com.
(1) Salaried Exempt: All non-executive salaried employees for whom overtime pay is not required by the Fair Labor Standards Act (FLSA). (2) Salaried Non-Exempt: Salaried employees for whom overtime pay is required by FLSA. (3) Special Recognition: Acknowledges outstanding individual or group achievements with small cash awards or merchandise (e.g., gift certificates). (4) Business Incentives: Rewards employees for a combination of financial and operational performance measures for the company, business unit, department, plan and/or individual performance. (5) Individual Performance: Rewards based on specific employee criteria. (6) Equity Awards: Awards stock to professionals who meet specific goals. (7) Turnover includes both voluntary and involuntary turnover, as well as retirements. Excludes any leaves of absence or long-term disability leaves.