According to the 2005/2006 US Compensation Planning Survey from Mercer Human Resource Consulting, US employers plan to grant average pay increases of 3.6% this year, slightly more than they granted in 2004. Pay increases are projected to remain constant at 3.6% in 2006. The current edition of Mercer’s survey, which has been conducted annually for more than two decades, includes responses from nearly 1,350 employers across the US and reflects pay practices for close to 13 million workers. The survey results are captured for five categories of employees: executive, management, technical/professional, nonexempt clerical/technician, and nonunion hourly.

“Although employers are seeing signs of an improved economy and pay increases are up a bit, the era of salary freezes is over,” says Steven E. Gross, leader of Mercer’s Employee Rewards business in the US. “Still reluctant to increase base salaries, companies are willing to reward performance through incentives and bonuses, especially as the job market becomes more competitive and the risk of losing key talent is top of mind.”

Mercer’s study shows that the number of organizations reporting salary freezes for one or more segments of their employee population dropped from 16% in 2002 to just 2% in 2005.

Mr. Gross points out that the differential between pay raises and inflation remains flat in 2005, continuing to reverse a trend of the late 1990s in which pay increases exceeded annual inflation by 2%. With tightening labor markets, this gap will most likely increase reflecting supply and demand, he says.

Attracting and Retaining Employees
As companies strive to grow their businesses while pay increase budgets remain low, they are faced with the challenge of hiring and retaining key talent. According to Mercer’s survey, in addition to spot cash awards, signing bonuses have become a prevalent form of rewarding employees, used by 55% of survey respondents.

For Information Technology jobs, spot cash awards are used by 82% of responding organizations, while 65% offer signing bonuses. Spot cash awards are also popular among other job families, including Accounting & Finance (76%), Sales & Marketing (72%), and Human Resources (72%).

“We’re also finding that leading companies are taking a total rewards approach to compensation. They’re addressing pay issues from three perspectives — what employees value, what companies need in terms of skills and capabilities to grow the business, and affordable and sustainable costs,” says Mr. Gross. “A holistic approach, one that acknowledges the needs of both the business and its employees, is critical to maintaining a competitive advantage in the marketplace.”

Other trends
Mercer’s study also examines emerging practices with respect to reward programs. Among the findings this year:

• As companies continue to struggle with their ability to meet employee needs within their fixed cost budgets, they are looking to variable pay like signing bonuses, spot cash awards, and project milestone awards. The percentage of companies offering such short-term incentives to at least one employee group increased slightly in 2005, up to 86%.
• Organizations are differentiating pay based on performance. When asked how individual performance impacts short-term incentives, respondents said it drives 18% of an executive’s award, 22% for management, 27% for professionals, and 25% for both nonexempt and nonunion employees.
• For the sixth year in a row, non-monetary recognition awards continue to top the chart with 70% of responding organizations offering them while another 9% are considering doing so.
• The use of broad-based equity (i.e., stock options) continues to decline from its peak of 37% in 2002 to 31% in 2005 with only 1.4% of responding organizations considering implementing such rewards.
• As companies seek ways to develop internal talent to grow revenue, 18% are considering adding formal career planning, 15% are considering adding competency-based performance management, and 14% are considering the use of multi-rater feedback.

According to Mr. Gross, employers want a balanced approach to the overall reward package and one that is directly linked to employee performance and company results.

For more information or to purchase the full report of Mercer’s 2005/2006 US Compensation Planning Survey ($450 for PayMonitor, $225 for a PDF, and $245 for a hard copy), visit www.imercer.com/cps or call +1 800 333 3070.