September 4, 2018 – U.S. employers are projecting slightly larger pay raises for employees in 2019 as the unemployment rate has fallen sharply and the job market has tightened, according to a newly released Willis Towers Watson report. The survey also found employers rewarded their top performers with the biggest raises this year and are projecting modestly larger discretionary bonuses next year in their ongoing effort to reward and retain the best performing employees.
The “2018 General Industry Salary Budget Survey” found U.S. employers expect to give exempt, non-management employees (i.e., professional) average pay increases of 3.1 percent in 2019, compared with three percent this year. Non-exempt hourly employees can also expect larger increases next year — three percent in 2019 versus 2.9 percent this year.
Employers are planning smaller increases for executives (3.1 percent versus 3.2 percent), while steady increases are planned for management employees (3.1 percent) and non-exempt, salaried employees (three percent). Only three percent of companies plan to freeze salaries next year. Pay raises have hovered around three percent for the past decade. The last year employers provided significantly larger increases was 2008 (3.8 percent).
The survey also found companies continue to reward their star performers with significantly larger pay raises than average performing employees. Employees receiving the highest possible rating were granted an average increase of 4.6 percent this year, 70 percent higher than the 2.7 percent increase granted to those receiving an average rating.
Pressure to Boost Salaries
“After a decade of consistently flat pay raises, we are witnessing a slight uptick as companies are feeling pressure to boost salaries, given the low unemployment rate and the best job market in many years,” said Sandra McLellan, North America rewards business leader at Willis Towers Watson. “While companies have been able to hold the line on raises, the tides are changing.”
“Many companies are establishing slightly larger salary budgets while at the same time focusing on variable pay such as annual incentives and discretionary bonuses to recognize and reward their best performers,” she said.
Indeed, the survey found companies are projecting that discretionary bonuses — generally paid for special projects or one-time achievements — will average 5.9 percent of salary for exempt employees, slightly larger than companies budgeted for this year. Slightly larger discretionary bonuses are planned for managers and salaried, non-exempt employees. Annual performance bonuses, which are generally tied to company and employee performance goals, are projected to hold steady or decline slightly in 2019 for most employee groups, the report said.
“A growing number of companies are coming to grips with the fact that employees are more willing to change companies to advance their careers and to talk openly about their pay,” said Ms. McLellan. “As a result, organizations are facing increased pressure entering next year to devise a focused strategy and plan on how to allocate their precious compensation dollars or risk losing some of their best talent.”
The Willis Towers Watson Data Services General Industry Salary Budget Survey was conducted between April and July, and includes responses from 814 companies representing a cross section of industries. The survey report provides data on actual salary budget increase percentages for the past and current years, along with projected increases for next year.
Wages for U.S. workers grew three percent over the last year, increasing the average wage level by 80 cents to $27.46 an hour, according to the latest ADP “Workforce Vitality Report.” The report tracks the same set of workers over time, which provides a more insightful picture of wage growth than overall wage growth.
Despite Drop in Unemployment, Wages Remain Concern for Many Workers
With unemployment hovering at 4.1 percent, many companies face the recurring question of how to attract and retain top talent in a candidate-driven landscape. In order to remain competitive, it is essential for companies to focus on trying to boost wages…
“We’re seeing interesting shifts in labor-market dynamics this quarter,” said Ahu Yildirmaz, co-head of the ADP Research Institute. “Employment growth for new entrants has dipped to -0.1 percent, while it has increased by 4.5 percent for those who are 55 and older.”
“In addition, job switchers who are 55 and older are seeing wage growth of 6.3 percent which is 1.5 percent higher than the prime workforce group who are 35-54,” Dr. Yildirmaz said. “This shift suggests employers are searching far and wide for skilled talent and workers who were once sitting on the sidelines have begun to return to the labor market in response.”
Veteran Recruiter Weighs In
“The focus for employers in this market is definitely on hiring the best candidates and retaining their best employees,” said Stacy Pursell, CEO of the Pursell Group. “Talent is at a premium right now. Because of that, employers have no choice but to spend more money recruiting top talent in the marketplace and also compensating the star employees they already have. If they don’t do the latter, then there is a very real risk that competing organizations will attempt to hire their best employees away.”
Professionals are more willing to change positions and change employers, especially under current market conditions, Ms. Purcell said. “One reason for this is the arrival of the Millennial generation in the workforce during the past decade,” she said. “Millennials by their very nature crave challenges, and they’re more willing to seek them out. Another reason is the scarcity of talent in the marketplace, which has created more and better opportunities for those professionals who are willing to explore them.”
CEO Wage Growth
According to a recent report by Korn Ferry, CEOs at the largest companies in the U.S. last year received the highest compensation increases since the recession. “Even with the anticipation of the CEO pay ratio disclosure mandate, so far we haven’t seen it dampen organizations’ willingness to pay for performance, including strong shareholder value and net income increases,” said the search firm’s 11th annual “CEO Compensation Study.”
The study, which examined pay for CEOs at the nation’s 300 largest public companies, included those that filed proxy statements between May 1, 2017 and April 30 of this year. Median revenues for the 300 businesses were $18.7 billion.
Pay for Performance: Not Everyone Agrees On CEO Value
Public company directors give CEOs considerable credit for corporate success, believing that 40 percent of a company’s overall results, on average, are directly attributed to the CEO’s efforts, according research released by Heidrick & Struggles and the Rock Center for Corporate Governance at Stanford University.
Median total direct compensation (TDC) for CEOs increased 8.7 percent to $13.4 million, said Korn Ferry. That is twice as much as last year’s 4.2 percent increase in TDC and the highest percentage increase since 2010, the first year of recovery from the Great Recession. While year-over-year base salaries remained relatively flat, with a 1.5 percent increase to a median of $1.3 million, a large percentage of the TDC increase came from performance-based compensation growth, said the study. Annual bonuses were up 4.1 percent. And LTIs (long-term incentive value) were up 7.4 percent.
“In years past, we’ve seen LTI increases but not bonus increases,” said Donald Lowman, Korn Ferry executive pay and governance practice leader for North America. “However, this year we are seeing increases in both areas. Even with the anticipation of the CEO pay ratio disclosure mandate, so far we haven’t seen it dampen organizations’ willingness to pay for performance, including strong shareholder value and net income increases.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; Stephen Sawicki, Managing Editor; and Andrew W. Mitchell, Managing Editor – Hunt Scanlon Media