Another major salary budget survey (this one from Hewitt Associates)  is out and it shows that merit and variable pay budgets have largely stabilized for 2010. With the economy (but not the labor market yet) on the mend, it's likely that these numbers will approximate what we will actually see in 2010.

Projections made in 2007 for 2008, and again in 2008 for 2009, turned out to be completely off the mark, mostly because few saw the recession (or or its strength) coming. But barring another swoon, merit projections have largely stabilized and are now looking like they will hold in 2010, for the most part.  Thanks to our friend Ann Bares at the Compensation Force blog for lending us her graphic.

As you can see, compared to projections made months earlier, it looks like most employer budgets are headed for the 2.5% range +/- based on this sample of over 500 companies, mostly larger employers.

Variable pay budgets have held up fairly well too, with companies budgeting 11.2% of payroll for variable compensation for salaried exempt workers, down somewhat from 11.7% in the earlier study done by Hewitt. Other employment groups were virtually unchanged from the previous survey.

Despite the slight drop in variable pay budgets, the longer-term trend for variable pay has been steadily up, increasing from 6.4% in 1994 to 11.2% in 2010 for exempt workers.

Another encouraging trend is that far fewer employers are planning to freeze salaries in 2010, 17%, down from nearly half (48%) in 2009.  Our guess is that if the economy continues to stabilize and slowly improve, the prevalence of salary freezes will drop even further.   In addition 0% of companies in the study were planning salary reductions for 2010, vs. 10% in previous earlier survey earlier this year.

Hewitt predicts, and we agree, that merit budgets will remain constrained for some time, as employers put more emphasis on variable/incentive pay, and as employers continue to struggle with rapidly rising employee benefits costs, primarily in health care.

In the past year and a half, compensation trends and practices have undergone the most rapid shifts in my 25+ years in the field. In late 2008 the sky was falling, as were merit budgets, and the stock market too. At the same time executive pay freezes and layoffs were taking off, and not in a good way.

A year later, the economy, while far from healthy, has stabilized and slowly started to improve.

Watson Wyatt has done an admirable job of tracking HR and compensation trends over this remarkable period. Every two months they have surveyed large groups of employers to capture the latest trends and practices of import to HR and compensation professionals. Their latest survey, "Effect of the Economic Crisis on HR Programs" (October 2009) has just been published, and below is a brief overview of some key data points. Follow the link above for the full report summary.

Employers are finally beginning to loosen the strings on the large number of salary freezes, executive pay freezes and/or cuts, and even beginning to reverse some of the cuts and freezes that were imposed during the highly uncertain times in late 2008.

For instance, of the companies that had implemented salary freezes:

• 54% say they plan to eliminate the pay freeze in the next six months
• a further 24% plan to eliminate the pay freeze in the next 12 months

Of companies that have implemented salary reductions, over 75% say they will reverse those in the next 12 months.

All of this is good news for employees and employers (less uncertainty; greater confidence). Furthermore, over 90% of responding employers have made employment offers in the past three months, and over 90% anticipate doing so in the next few months as well.  These are all good signs for the recovery, but real employment growth is likely still a ways off.

All the news is not good though, as about one-fifth of employers still anticipate making layoffs in late 2009 or in 2010. This is hardly the data you would typically see in a solid economic rebound, but we believe that these percentages will decline in the months ahead.

Despite the weak labor market, almost two-thirds (65%) of employers report that they are concerned about the retention of critical skilled employees. (For a detailed discussion on this topic, request an article from StrategicPay Series manager, Doug Sayed, at doug@StrategicPaySeries.com).

Clearly, the worst is over, but we are not fully in the clear yet. The economic recovery is fragile, and many employers have yet to find their footing.

Salary budget increases are at there lowest in 36 Years, according to preliminary results released today by WorldatWork.

In addition, according to the press release, at least 40 percent of salary budgets are frozen for officers and executives, says the WorldatWork survey of U.S. organizations.

Below is the press release from WorldatWork that was published earlier today:

Washington, D.C. – July 8, 2009 – Corporate salary budget increases have dropped to historic lows, according to the WorldatWork 36th Annual Salary Budget Survey. At 2.2 percent, the 2009 increase is the smallest in the survey's history and 1.7 percentage points below the 3.9 percent that had been projected in the previous year's report. The WorldatWork survey, the largest of its kind, clearly shows that the economic crisis continues to put pressure on employee salaries, though projections for 2010 suggest improvement.

The 2,600 respondents to the survey are WorldatWork members who are employed in the compensation and benefits departments of various employers, representing a total of 16 million U.S. employees.

"A projected salary budget increase of 2.8 percent for 2010 indicates we may have touched the bottom this year and a turnaround may be on the horizon," said Anne C. Ruddy, CCP, president of WorldatWork. "While it's heartening to think the worst may be behind us, compensation plans will likely be in flux for at least the next 12 months. We plan to re-survey our members this summer to monitor thawing of any kind."

"This recession is having a greater impact on compensation than the previous recession brought on by 9/11, when employers still managed to increase salary budgets by 3.6 percent," observed Alison Avalos, research manager for WorldatWork. In spite of the falling budgets, the survey shows employers are committed to awarding raises to about eight in every 10 of those employed. "This may come as a surprise to many given that one in three survey respondents indicated they are planning zero-percent salary budget increases this year," added Avalos. "Layoffs, hiring freezes, shifting pay increase dollars from executives to staff, and other cost-saving actions may be allowing employers to continue planning for at least some pay increases for remaining employees, especially top performers," Avalos explained.

Human resource practitioners continue to use variable pay, which consists of cash bonuses and other incentives, to reward results. For 2009, employers are budgeting an average of 5 to 11.5 percent for variable pay, depending on employee category.

About the Survey:
WorldatWork collected survey data in April 2009. The full survey report includes results for North American regions, all 50 states, major U.S. metropolitan areas, major industries as well as data by organization size, performance category and employee category.

Additional data cuts are now possible via SBS Online, which gives subscribers the ability to customize data cuts. A free Webinar will be held on August 25 for members and non-members.

In an independent survey by IOMA (April 2009), the WorldatWork Salary Budget Survey was rated the most popular source by 74 percent of large companies surveyed.

About WorldatWork® - The Total Rewards Association
WorldatWork is a global human resources association focused on compensation, benefits, work-life and integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of more than 30,000 members and professionals in 75 countries with training, certification, research, conferences and community. It has offices in Washington, D.C. and Scottsdale, Arizona.