Pay increases in 2009 were at an all-time low, at least since good records have been kept on this type of data. In 2009, over 50% of companies either froze pay or worse, by far the highest pay pull-back/retrenchment numbers I have seen in my 25+ year career in HR and compensation.

2010 portends to be a bit better for employees, but employers are still keeping a pretty tight clamp on their purse strings, and understandably so, with economic recovery still looking a bit tepid.  Predictions are for pay increase budgets of about 2.7% in 2010, a vast improvement compared to an average 1.8% increase in 2009, by far the lowest year on record. Both of these data points are from a recently released Hewitt report.

Variable pay budgets (budgets for incentive or "bonus" programs) are expected to remain stable at about 12% for 2010. While the 2010 variable pay budgets are about in line with 2008 and 2009, the long-term trend has seen a slow but steady upward march, and we at the StrategicPay Series expect that trend to continue.  In 1990, corporate variable pay budgets were about 5% of payroll, and today they are more than double that, while merit pay budgets have been at historically low levels since the 2001 recession. 

Hewitt expects variable pay budgets to slowly continue upwards.  In a study released in the spring of 2009, Hewitt predicted  an average variable pay budget of 16% of payroll and a base pay increase pay budget of 2.0% in 2020.

While, of course, no one knows what's going to happen 10 years into the future, the predicted trends are clear: continued pressure on fixed-cost compensation increases (i.e. base pay), combined with a continued willingness to pay for performance, in the form of variable pay.  We agree.

Some of my fellow bloggers at the Compensation Cafe' have been writing recently on how to address the issue of today's small merit budgets with employees and managers.  Here are a few links to help you with these issues:

• 10 Things Your Managers Must Tell Employees about Your Teeny, Tiny Merit Budget by Margaret O'Hanlon
• 10 Tools for Communicating a Teeny, Tiny Merit Increase Budget, by Margaret O'Hanlon
• Despite Pay Dissatisfaction, Most Employees Expect to Maintain Current Level of Benefits in 2010, by Becky Regan
• Show Your Creativity as a Rewards Professional, by Doug Sayed

In addition, I would add a few other key thoughts, such as:

• Job Titles: Are They Really Free? by Ann Bares
• Food for Thought: Pay for Performance Obsolete?, by Darcy Dees
• Agility. The New Reward Watchword, by Ann Bares via Compensation Force

So, while there may be a shortage of funds available for organizations to distribute, there is no shortage of ideas and creative strategies for addressing today's challenges.  If there was ever a time to show your worth as an HR and/or compensation professional, now would be it!

The future isn't looking too good for the typical wage earner in America these days. Not surprisingly, wage growth is quite slow right now, but there is also no foreseeable impetus to increase that growth any time soon, unless you're lucky enough to be in a few selected high demand roles (such as for skilled health-care workers and selected technical professionals).

Not only is the labor market in the worst shape in decades, we likely haven't hit bottom yet.  In addition, nearly all economists are predicting a painfully slow jobs recovery over the next few years.  Of the millions of jobs lost in this recession, the concern among many labor market pundits is that a good chunk of these jobs may never come back (i.e., many of the manufacturing job losses), and of the ones that do, the recovery will be several years in the making.

Back to wage growth though, here's the current situation relative to the pre-recession period: in the first half of 2007, wages were growing at a healthy 3.7% annualized rate. In the first half of 2009, wages increased at a 1.3% annualized rate, and that may well go down as the labor market continues to deteriorate (labor market conditions generally lag overall economic trends, so even though we've hit bottom overall, according to most economists, the labor market probably hasn't yet).

The current (August) national unemployment is at 9.7%, and is expected to bottom in the 10%+ range sometime early next year.  That's the good news. IHS Global Insight is predicting that in 2014, the unemployment rate will average 7.6%, which is still well above the unemployment rate before the recession started in late 2007.  The predicted molasses-paced recovery will have a major impact on wage growth in the U.S. for the next few years at the least.

Labor market dynamics are a complex brew of many factors, but at its core is the same "supply and demand" that you learned in Econ 101. With labor current market supply quite high and demand very low (and expected to stay weak for the next few years, due to the slow economic growth being projected), the the case for a strong rebound in wages is not in the cards, barring a much more robust recovery than expected.

It is likely that wage growth could be stuck in the 1.5% to 2.5% range for years, or roughly one-half to two-thirds of historical wage growth.

If this predicted scenario plays out, the implications for the typical American wage earner will be profound. It will also have a large impact on employers, who rely on economic growth to fund their pay-for-performance programs.  For some ideas on how to address these issues, see fellow Compensation Cafe' blogger Margaret O'Hanlon's recent post on dealing with "tiny" merit budgets, and my earlier post on using your  professional creativity in these lean times.

Doug Sayed, SPHR, CCP is founder of Applied HR Strategies Inc., a Seattle area strategic compensation consultancy, and lead author of the StrategicPay Series "Base Pay Toolkit."

Preliminary results from Culpepper's annual survey of salary budgets reveal that global base salary increase budgets have risen by an average of 51 percent from 1.89% in 2009 to 2.85% in 2010 (see below for U.S. data). The survey was conducted from late June through mid August, 2009.

Key Findings from the study:

• The number of companies freezing salaries is projected to decline from 37 percent in 2009 to 13 percent in 2010.
• Excluding salary freezes (companies projecting a 0% increase), global base salary increase budgets are projected to increase slightly from 3.18% in 2009 to 3.27% in 2010.
• Base salary increases in the U.S. are projected to increase from 1.63% in 2009 to 2.65% in 2010. Excluding organizations projecting a 0% increase budget, salary increases in the U.S. are projected to hold relatively steady from 3.08% in 2009 to 3.07% in 2010.
• Base salary increases in Canada are projected to increase from 1.13% in 2009 to 2.38% in 2010. Excluding freezes, salary increases in Canada are projected to increase slightly from 2.95% in 2009 to 3.02% in 2010.
• Base salary range structure increases are projected to increase from 1.18% in 2009 to 1.61% in 2010. Excluding freezes, salary range structure increases are projected to decline slightly from 2.84% in 2009 to 2.70% in 2010.
• Additional breakouts and data for over 80 additional countries will be published in the final report, available September 2, 2009.

Salary increase budgets have changed dramatically over the past year. In August 2008, before the global economic crisis unfolded, average base salary increases exceeded four percent (Figure 1) and only two percent of companies were freezing salaries (Figure 2). From late 2008 through mid-2009, the number of companies freezing salaries increased to 37 percent, which drove average base salary increases below two percent.

Overall, projections for 2010 have improved significantly compared to 2009. However, a relatively high number of companies plan to freeze salaries in 2010, and average projected base salary increases are still much lower than recent years.

Data Source: Culpepper Trends Survey of 714 participating organizations reporting salary increase data.

Availability of Final Results:
A comprehensive report with final results and analysis from our recent survey, 2009-2010 Salary Budget & Planning Survey, will be available by September 2, 2009. The final comprehensive report will include data breakouts for the U.S. and Canada by job function/level, number of employees, and industry sector. Additional breakouts will be available for 90 countries and 16 international geographic regions.

Source: Culpepper Trends Surveys, August 2009, www.culpepper.com.

Full disclosure: Culpepper is a strategic partner of the StrategicPay Series.

On August 25th (9am Pacific Time, 12pm Eastern) WorldatWork will offer a FREE webinar outlining the results of their recently-released 2009-2010 Salary Budget Survey (SBS).  You must be a WorldatWork member to attend for free.

If you're not a WorldatWork member, you can obtain a copy of the SBS for $235 at this link.

This is essential information for all HR and compensation professionals involved in compensation budgeting and planning. Hopefully you can either attend the webinar and/or purchase the survey itself.

Either way, follow this blog for more information on salary budget and related trends.