Pay Increases in 2009 May Disappoint Workers

The annual salary review season is upon us and employers are struggling to manage salary increases against a backdrop of continuous economic turmoil. We decided to take a look at what employees can expect for merit increases in 2009 as ever worsening economic developments come to light and threats of layoffs continue to be reported.

According to a survey of online readers conducted by Business & Legal Reports (BLR) in late October, an increasing number of employers are considering making changes to their current pay budget plans for 2009. Approximately 39.9% of organizations responding to the survey indicate that they will be making adjustments downward in an effort to ride out the economic storm. On average, employers are currently planning 2.8% merit increases and an average cost of living adjustment of only 1.2%

The BLR study also reveals that, in terms of the types of changes being considered, 39.1% are considering a reduction of the overall pay budget, 33.9% are considering smaller individual increases, 24.7% are considering pay freezes and 14.7% are considering a delay of pay increase effective dates.

Hewitt Associates conducted a similar study in November and December and found that 42% of the organizations surveyed plan to make changes to their salary budgets and variable pay spending strategies for 2009 because of the economic downturn. Average salary increases for 2009 are expected to drop below 3% for all employee groups for the first time since Hewitt began tracking such data in 1976. Specifically, salaried employees will see an average increase of 2.5%, down from an estimate of 3.8% in July 2008. Executive pay increases will drop from 3.8% to 2.2% and increases for nonexempt staff will decrease from 3.7% to 2.6%

In the Hewitt study companies who indicate they are not making changes to their merit increase plans will award, on average, 3.8% increase to executives, 3.7% to salaried exempt and nonexempt workers and 3.6% to nonunion hourly employees.

As part of our own recent study on Job Satisfaction and Retention, which will be published in January 2009, we asked employers to share their ideas on compensation trends for the coming year. Results revealed, similar trends to the BLR and the Hewitt studies, that 42.6% of employers plan to award lower salary increases for the coming year, 6.6% plan cost of living adjustments in lieu of merit increases and 7.3% plan no increases for 2009.

As disappointing as these numbers may be to many employees, it is important to remember that reduced increases are planned as an alternative to other cost cutting measures such as layoffs, pay freezes and reduced benefits. Employers understand that these actions may result in turnover in the long run, they are confident – at a rate of 46% according to Hewitt Associates - that most employees will understand the need to cut costs now to ensure financial viability in the future.