Pay Raises Are the Smallest In Decades

CU360
September 2, 2009 | COMMENTS

Employers have increased salaries this year by the smallest percentage in decades, according to two surveys released in late July.

HR consultants Watson Wyatt Worldwide and Hay Group estimate that median pay raises for 2009 ranged between 2% and 3%. The U.S. Labor Department says employee pay increased an average 2.2% in the year ended March 31, down from 3.2% in the year-earlier 12-month period.

For next year, the HR firms are projecting slightly bigger raises of 3%. That's the smallest forecasted increase in the 29 years Hay Group has done its survey. Watson Wyatt says its prediction is among its smallest ever. The Watson Wyatt and Hay Group surveys try to cover a broad swath of workers, including both salaried and hourly employees in most industries.

The reasons are clear: In a recession that has eliminated 6.5 million jobs since the end of 2007, millions of workers have suffered pay cuts or have been forced to take time off without pay. Economists expect the U.S. economy to resume growing later this year, but the labor market typically recovers more slowly.

“It's a pretty bleak picture for employees,” says Kenan Abosch, compensation practice leader for Hewitt Associates, another consulting firm. Hewitt's survey, to be released this month, indicates similar trends—a record low increase for 2009 and a slight bump for 2010.

Analysts say the findings demonstrate the depth and volatility of the recession. A year ago, the consulting firms predicted average workers would see pay increases of 3.5% to 4% this year. But the new surveys show that raises fell far short of that.

Toward the end of last year, companies went into “panic mode to try to throw as much cost overboard as possible,” says Abosch. The disparity between the projection and the actual raises was the largest in the 33 years Hewitt has tracked the numbers.

The numbers demonstrate that “a severe enough economic downturn will force companies to do things they never thought they would do,” says David Wise, senior consultant at Hay Group.

Still, the small size of the projected raises for next year likely won't upset workers as much as it would have in the past. “Today, people are more focused on job security than they are on a pay increase,” Wise says. “If they can keep a job, they're already ahead of the game.”

Workers may actually be somewhat encouraged by the results, say analysts, noting that increases in the 3% range are decent given the circumstances. Additionally, many employers are poised to restore wages that had been cut and to resume granting raises. Going forward, many employers will feel they must raise salaries despite the slack labor market to attract and retain key employees. Stingy organizations are likely to lose superior workers.

The averages mask considerable variation in how employers treat their best and worst employees, say analysts. This year, Watson Wyatt estimates that top employees—those who “far exceeded expectations”—received raises averaging 4%, while lower-ranked employees got only 0.2% increases. Such pay disparities have been growing in recent years as companies compete to retain top talent.

The smart companies will be the ones who effectively distribute pay, Wise says. “You can't spread the pay evenly like it's peanut butter,” he says.