Although pay increase budgets are now at 2.8 percent, an increase from the all-time lows of 2.2 percent in 2009, this bump does not seem to come from employers distributing larger pay increases, finds the 39th annual WorldatWork 2012-2013 Salary Budget Survey.
Rather, this increase appears to be coming from respondents reporting frozen salary budgets. In fact, the number of zero percent responses fell from 33 percent in 2009 to 5 percent in 2012.
"There is an inverse relationship between the spike in organizations budgeting zero percent and the overall average salary budget increase," says Alison Avalos, a Certified Compensation Professional and research manager for WorldatWork. "Picture an iceberg thawing and its reflection in the water with the portion of organizations freezing pay increase budgets represented by the portion of the iceberg visible above the water. When pay budget freezes spiked in 2009, overall mean and median salary budget increases plummeted, pulled down by the zero values.
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"The overall average salary budget seems to be holding steady at close to 3 percent, but the growth is not because employers are being aggressive with salary increase budgets. It is mostly because the number of zero percent responses has declined in the three years since the recession."
As average salary increase budgets dip under 3 percent for the fourth consecutive year, managers may consider forgoing differentiating employee performance; however, because of the modest salary budgets, pay for performance should be more heavily underscored, says Kerry Chou, a Certified Compensation Professional and practice leader at WorldatWork.
"In order to accomplish this, you need to effectively allocate available salary dollars, which could mean low or no raises for marginal performers," Chou says. "And while this isn't a pleasant conversation for managers to have, in the long run, it's easier than losing your stars to the competition, and then spending far greater sums to find replacements. A small pie can still be a great dessert; you just need to serve bigger pieces to fewer guests."
Detroit-based respondents report the lowest overall average salary increase budget at 2.6 percent for this year while Houston-based respondents rank at the highest at 3 percent. Most metropolitan areas report average salary budget increases between 2.7 percent and 2.9 percent for 2012 and expect those number to climb to 2.9 percent to 3.1 percent in 2013.
For public administration, pay increase budgets fell to a record low of 1.3 percent in 2010 and 2011 but are now at 1.7 percent. The mining industry, however, is above national figures with average 2012 salary budget increases of 4 percent.
Eighty-two percent of respondents that use variable pay grew to 82 percent in 2012, an increase from 79 percent in 2011. The most common variable pay programs are a combination of awards based on organization and unit success as well as individual performance.
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