Salary Budgets Lag Behind US Rate of Inflation

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For the first time since 1980, the U.S. rate of inflation is higher than the average total salary budget increase. During the 12-month period ending April 2011, inflation, as measured by the U.S. Consumer Price Index (CPI), was 3.2 percent. That compared to a total salary budget increase of 2.8 percent for the same period, according to the WorldatWork 2011-2010 Salary Budget Survey.

Why haven’t pay increases kept up with the rate of inflation? A number of factors–particularly high unemployment–are combining to keep salary increase budgets low, suggests the study, which includes data from more than 2,400 participants, representing nearly 15 million U.S. employees. The data, collected in April 2011, represents a wide variety of U.S. companies and industries, distributed across all 50 states.

“Salary budget planning does not happen in a bubble,” explained Don Lindner, senior compensation practice leader for WorldatWork, an association of total rewards professionals. “Labor costs, productivity, unemployment and other economic factors are important considerations for compensation professionals when making budget recommendations.”

Uneven Demand for Labor

Despite rising prices for goods and services, evident in the CPI, the demand for labor is still uneven, with the nation’s unemployment rate averaging 9.4 percent from May 2010 to April 2011. Salary budget increase trends might see significant improvement only if unemployment decreases, which would put pressure on employers to raise wages in order to stay competitive. “Successful organizations will not pay more than necessary for any expenditure, and with low risk of losing employees to other organizations, higher increases are not justified at this time,” explained Lindner. “This also explains why hardly any companies are making up for past pay freezes in this year’s budget.”

“Time will tell if salary budget increases will return to pre-recessionary levels, but hikes may only occur if the weight shifts between the supply and demand for labor,” added Alison Avalos, research manager for WorldatWork. “Mining, quarrying [and] oil and gas companies are currently experiencing a shortage of skilled labor, so their 2012 planned salary budgets are above average, at 4.1 percent.” U.S. employees in other industries, on the other hand, can expect average pay increases of 2.9 percent in 2012, according to WorldatWork's research.'

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