New Hay Group Study Finds that 2004 Salary Increases For Most Employees Remain Lower Than Historical Average of 4.0%

Business Wire, Sept 27, 2004

PHILADELPHIA -- Hay Group Provides Summaries of Pay Increases and Bonus Payouts and Outlines What Employers Can Do to Maximize Their Compensation Investments and Retain Their Top Talent

Median annual merit increases for most employees remain below historical averages in 2004 according to new data released by Hay Group this week. Average 2004 pay raises for blue collar (3.0%), nonexempt (3.5%), and professional/managerial employees (3.5%) remain at 2003 levels, which were lower than previous years'. While median increases for executives (3.5%) are up from 2003, they are still below 2001 levels.

Prior to 2001, the historical average merit increase for all levels was closer to 4.0%. Of the four employee groups listed above, only blue collar workers failed to outpace the Consumer Price Index of 3.0% for the 12 months ending July 31, according the Bureau of Labor Statistics.

"We're still in a valley," said Doug Jensen, Hay Group's head of US Reward Consulting. "The outlook for some industry sectors is better than others. Most companies are allocating their scarce HR dollars across the employment base and attempting to pay-for-performance and make sure their reward programs are aligned with the business."

These figures are from the new 2004 Hay Compensation Database representing all industries and including over 1,700 organizations and more than three million employees.

Annual Bonus Payouts Higher in 2004

While pay raises may have been the same as 2003, the most recent annual bonus payouts were higher than those paid out in 2003. Typically, each employee has a pre-defined "target bonus" each year; how close the actual payout is to the target payout depends on a number of factors, primarily financial performance of the organization.

Average 2003 bonus payouts were 81%, 75%, and 70% of target for Executive, Managerial, and Exempt/Professional employees. In 2004, payouts for those same groups rose to 95%, 82%, and 82%, respectively. These figures indicate that while companies are still being conservative with salary increases, financial performance has improved, allowing for larger bonuses to be paid.

"While average pay increases may have been no different than last year, bonus-eligible employees received bigger bonus checks, resulting in a net gain," continues Jensen. "Hopefully those higher payouts were to reward better performance."

Economic Outlook

Based on US Department of Commerce and Department of Labor reports, Gross Domestic Product has increased by about 5% over the past 12 months, corporate profits are up 18%, and employment has increased by 1.7 million jobs.

In the manufacturing sector, particularly durable goods manufacturing, the numbers are less positive. Corporate profits are up, but that compares to widespread losses that were being reported 12 months ago, and profits are still well below what they were in 2000. The number of jobs in goods-producing industries has increased by 200,000 in the past 12 months but also remains well below 2000 levels.

These ups, downs, and uncertainties form the economic context in which companies have made 2004 compensation decisions and are planning actions for 2005. It appears that companies are exercising caution in the face of this mixed economic environment by focusing on:

--Continued caution and control of compensation and healthcare benefits costs;

--Variable pay that aligns compensation costs to company performance; and

--Spending limited funds most effectively--through strengthening the link between pay and performance.

Predictions for 2005

Most companies surveyed plan to keep their salary increase budgets the same as those for 2004. This means that overall salary increases will likely remain below historical levels again in 2005.

However, they also plan to maintain the same level of average merit increase. This indicates that most are taking a conservative approach, thus keeping pace with what we've seen since 2001. Continued improvement in financial performance will mean that annual bonus payouts will likely meet or exceed 2004 levels. And while the average increases remain low, companies are taking steps to make sure that top performers receive higher-than-average increases.

"Top performers will almost always have a greater ability to sell themselves to prospective employers," says Jensen. "So even if the labor market continues to be flat or grow at a slow pace, companies should be mindful of paying for performance. That means identifying your star performers and rewarding them for their superior performance."

In terms of rates of change, we tend not to see appreciable differences by geography. What would cause them to be different is a significant cluster of industries in a particular region (e.g., Financial Services firms in New York).

Comparison by Industry--Current vs. Planned Salary Increases

While the General Market figures provide guidance on market pay movement across industries, companies typically look to a second set of numbers to inform pay decisions--increases among companies within their own industry. Companies often vie not only for market share but for top talent among industry competitors, so tracking industry-based increases is increasingly important role for Human Resources management.