Moderate Pay Raises Foreseen, with Fully Funded Annual Bonuses

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Most companies keeping their salary budgets relatively tight 

Reflecting uncertain economic conditions and a conservative cost management environment, U.S. employers are projecting moderate pay raises for employees in 2012. Employers do expect to fund their annual bonuses fully for workers in 2011, as corporate profits have increased, according to survey data from consultancy Towers Watson.

The Salary Budget Survey of 773 U.S. companies, conducted by Towers Watson Data Services in June and July 2011, found that companies are planning pay increases that will average 2.8 percent in 2012 for their salaried nonexecutive employees. This represents a moderate increase from the average 2.6 percent raise workers are receiving in 2011 and 2.6 percent they received in 2010. Similar raises for 2012 are planned for executives and nonexempt employees.

“Until the economy shows some solid and consistent improvement, most companies are keeping their salary budgets relatively tight,” said Laura Sejen, rewards global practice leader at Towers Watson. “At the same time, companies also recognize the need to reward their top performers or risk losing them to competitors and, as a result, continue to differentiate pay raises based on individual performance.”

According to the Towers Watson survey, workers who receive the highest performance ratings will be in store for median salary increases of 4.5 percent, which is 80 percent more than workers with average ratings will receive (2.5 percent). Workers with below-average performance ratings are expected to receive median merit increases of 1.4 percent.

Other Salary Forecasts

Three employer surveys released in July 2011 showed slightly more optimistic pay raise expectations.

A Mercer survey indicated that 97 percent of U.S. organizations were planning to award base pay increases in 2012, with an expected average increase for U.S. workers of 3 percent, up slightly from 2.9 percent in 2011 and 2.7 percent in 2010 (see "2012 Compensation Budgets Remain Lean, with Focus on Top Performers").

Hay Group reported that U.S. employees could expect median pay increases of 3 percent in 2012, consistent with salary increases for 2011 but below the 4 percent increases seen from 2005 to 2008 (see "Forecasted 2012 U.S. Base Salary Increases Remain Steady").

WorldatWork projected that salary budgets will rise by 2.9 percent in 2012 and that, based on individual performance ratings at year-end 2011, high performers can expect an average pay increase of 4 percent, middle performers a pay increase of 2.7 percent, and low performers an increase of 0.7 percent (See "More Employees to Get Raises as Pay Freeze Thaws").

Bonus Budget Funding

A separate North American Talent Management and Rewards Survey of 316 U.S. and Canadian companies, conducted by Towers Watson in May and June 2011, found that companies’ average projected bonus funding for 2011 performance is 101 percent of target, marking the second consecutive year that companies are able to fund their annual bonuses fully for workers. Companies funded annual bonuses in 2010 at 111 percent of target.

“Despite the recent economic turmoil, many companies are experiencing stronger profits and higher revenues this year. Since funding of annual bonus pools is typically based on these financial measures, companies are anticipating being well-positioned to fund their annual bonus pools at target or better at year-end,” said Sejen.

SHRM members can receive links to online articles about 2012 salary forecasts and information on survey participation opportunities by visiting SHRM's Hot Topics Express Request web page and selecting the key term Salary Increase Projections under "Compensation."

Stephen Miller, CEBS, is an online editor/manager for SHRM.