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With total salary increase budgets now barely exceeding inflation, even top performers may barely be keeping up with cost of living increases, according to The Conference Board Salary Increase Budgets for 2010 – Winter Update, containing revised projections for 2010 U.S. salary budgets and salary structure adjustments.
Projected new 2010 projections show that salary increase budgets in the U.S. will be below 3 percent for the first time in more than two decades, and projected 2010 salary structure adjustments for all categories of employees are not expected to top 2.0 percent – well below The Conference Board's forecasted inflation rate (2.6 percent).
"Compensation professionals usually make sure that the salary structures move in lock step with inflation in order to ensure that structures represent market rate for jobs," says John Gibbons, program director, human capital, The Conference Board. "They budget increases in a particular year to reward great performance, allowing earnings to exceed inflation and move people up through the ranges. Salary ranges also represent employers' anticipation of what the job market will require. Projections of near zero percent in real terms mean that employers are making the assumption that the salary market is simply not going to move up, regardless of increases in the cost of living."
"U.S. workers will continue to face downward pressure on their salaries and wages," says Linda Barrington, managing director, human capital, The Conference Board and co-author of the report. "Without the purse strings loosening on financial rewards, employers are going to have to rely on other ways of engaging employees, especially top performers, in order to keep their companies competitive."
The revised median forecast of salary increase budgets for 2010 now stands at 2.8 percent for all employee groups except executives (2.75 percent). This is the lowest level in the 25-year history of The Conference Board survey.
This historical low is consistent with historically low growth in government compensation measures. According to the U.S. Bureau of Labor Statistics' Employment Cost Index released last week, in the 12 months to December 2009, total compensation grew by 1.5 percent while consumer prices rose by 2.7 percent, meaning that, adjusted for inflation, total compensation fell by 1.3 percent. The Employment Cost Index's increase is the lowest since the BLS survey began in 1982; prior to this recession, the 12 month percent change never went below 2.7 percent.
"Despite five months of improvement in The Conference Board Employment Trends Index (ETI) suggesting that a turning point in job growth is on the horizon, recovery in compensation is probably a few years away," says Gad Levanon, associate director, macroeconomic research, The Conference Board. "In the previous three recessions, compensation began accelerating only several years after employment bottomed. High levels of unemployment allow businesses to limit raise demands from existing workers and hire workers from unemployment at lower compensation levels."
The Annual Salary Increase Budgets Survey, conducted in November among 285 U.S. organizations, represents a sharp drop from the 3 percent median forecasted for salary increase budgets in April 2009. More than a quarter of respondents (27.7 percent) said they had already changed their originally projected total increase budget for 2010. The median projected total salary increase budget for this group, 2.5 percent, is lower than that of respondents overall. Compared with their original median projected increase budget, the current median projected 2010 salary increase budget for these respondents is .50 percentage points lower than what they report as their original forecast for 2010.
The highest forecasted median salary increase budgets for 2010 are in consulting services – 3 percent for all employee groups except non-exempt hourly, which stands at 2.85 percent. The second highest projections are reported in the trade sector, with all employee groups at 3 percent except non-exempt hourly (2.5 percent). The lowest 2010 increase budgets are in the banking industry (2 percent).
For merit increase budgets forecast for this year, the median is 2.5 percent in each employee category for all industries. This compares to lower 2009 medians of 2.10 percent for non-exempt hourly, 2.38 percent for non-exempt salaried, and 2 percent for exempt employees. The median merit increase budget for executives in 2009 was zero. The highest median projected merit increase budgets for executives are in energy/agriculture, manufacturing and trade, at 3 percent.
Salary increase budgets refer specifically to the pool of money that a company dedicates to salary increases for the coming year. It is represented as a percentage of current payroll generally; the salary increase budget is calculated using a predetermined total percentage of base pay, etc.
Salary structure adjustments refer to the changes (usually annual) to the salary structure of a compensation program. Organizations make these adjustments to the minimum, midpoints, and maximums of their pay ranges to account for changes in the cost of living and or changes in the salary markets within the industry.