Mixed Signals Complicate HR and Compensation Planning

A variety of major compensation and HR practices studies are showing mixed signals and making current and forward HR and compensation planning more difficult than at any time since the last major recession in the early 1980's.

Some recent studies, since as the Manpower Employment Outlook Survey (MOES) indicate that the outlook for the second half is relatively "stable" (an end to recent declines on the hiring front), while others, such as recent studies released by Mercer and Watson Wyatt indicate the deep impact that recent economic events and developments have had on HR and developing compensation plans and practices.

In addition, WorldatWork recently released the preliminary data for its 2009-2010 Salary Budget Survey, and the data is certainly revealing:

• Of the 2.9% merit increase predicted for 2009 (in the fall of 2008), the actual increase is likely to be closer to 1.9% based on the data from the thousands of companies that participated in the most recent (spring 2009) WorldatWork survey (Keep in mind this is down from around 4% that was predicted at this time in 2008 for 2009.
• Early projections for 2010 are in the 2.8% range for merit increases.  This data is certainly subject to revision due to the major swings in economic expectations over the past several months.
• Salary structure increases are predicted to in the vicinity of 1.8% for 2010, after only about 1.5% increases in 2009 (the lowest in memory).

Due to the highly unpredictable nature of the current economic situation, this is the latest and and most valid information available.  Stay tuned for updates as more tangible and recent data becomes available.

Are wages falling in this recession? 

The answer to that question depends on who's wages we're talking about. Different angles of this question will yield different answers.

With nearly 15 million Americans unemployed (and that doesn't count "disaffected" job seekers who've dropped out of the labor force or taken part-time work in the interim), competition for jobs hasn't been this high in decades.

And just like many of us learned in Economics 101, when demand falls and supply increases,  prices fall (in this case, prices = wage rates). Generally this is most pronounced at the hiring level, as most companies are generally reluctant to cut wages for their workforces overall.

Despite the downward pressure, if you consult salary surveys coming out the first half of 2009, most will probably show a modest (albeit small) increase in overall wage rates from last year. Why?  The reason is that salary surveys are generally measures of pay for employed workers, not a measurement of how hiring rates are changing, although that data eventually works its way into databases that survey vendors report data from.

Chances are that for most jobs, hiring rates are indeed falling, while overall wages rates are fairly stable (wages rates are stable to slightly increasing for those that have remained employed). For instance, an article on the SHRM (Society for HR Management) website  reports that hiring rates have dropped 7.0% in the service sector and 10.0% in manufacturing year over year (March '08 to March '09).  While these are large drops by any standard, that doesn't mean that wages are falling precipitously everywhere. We know that both of these areas are very weak right now, so these drops are not too shocking.

But what about stronger areas like health care or government (almost nothing can stop the growth of government!). We doubt wages have fallen for nurses and many other still in-demand health care workers, and for "hot skill" roles in technology, such as experts in web search technology or social networking (Twitter anyone?).

A good labor market analogy is that labor markets are much like the regional weather patterns, full of micro-climates within larger overall weather trends and systems.  We know, for instance, that certain areas within specific wine growing regions are slightly cooler/warmer or wetter/dryer than other nearby areas, sometimes just a hundred yards away, and it's the same with labor markets.  We know the macro trend is down in this labor market, but that doesn't mean it's a universal trend that applies to all jobs and all regional labor markets. Do your research before making sweeping generalizations based on the larger overall pay trends.

Doug Sayed, SPHR, CCP, is principal at Applied HR Strategies, Inc., a compensation consultancy based in the Seattle area.  Doug is a Certified Compensation Professional (CCP) with over 20 years of HR and compensation experience, and a Master's degree in HR management from the Ohio State University. He is the lead developer of the StrategicPay™ Series, a series of "do it yourself" compensation resource toolkits, the first edition of which has just been released for publication.

According the Watson Wyatt report "Effect of the Economic Crisis on HR Programs-- Update: April 2009,"  the worst may be over in terms of corporate cutbacks.  This doesn't mean we're "out of the woods" yet, but or at least a majority of firms surveyed believe they are done with making cuts to salary budgets, freezing pay, doing additional layoffs, etc.

Despite this encouraging information, it may well be too early to call a "bottom" to this economic cycle, and especially to the labor market, which tends to lag the overall economy anyway.

According to the Watson Wyatt study, it does appear as though many, if not most firms believe they are done, or nearly so, with making additional cutbacks.  For instance, according to a SHRM summary of the study, the majority of participating firms said they planned:

• No further salary reductions (89 percent).
• No further salary freezes (76 percent).
• No further hiring freezes (67 percent).
• No further organizational restructuring changes (65 percent).
• No further layoffs (53 percent).

We don't know if we're at the bottom yet, but it looks like we're at least starting to get close.  It is possible that maybe the worst is over, but only time will tell if that's the case. Keep your eye on weekly unemployment claims (which tend to peak 2-3 months before an economic upswing starts), a bottom in housing (not yet!), and improved consumer confidence. Consumer confidence has recently turned upward, but from a very low level, so its too early to say we've turned the corner yet in this area.

Does that mean it's off to the races, once a recovery starts?  That's highly unlikely, and the almost no one is predicting any significant economic recovery before 2010, with the labor market recovery trailing the rest of the economy upwards.  But, it does look like we are starting to near to a bottom, and that would be a good thing for just about everyone.