LINCOLNSHIRE -- While there is projected to be a slight uptick in salary increases in 2012 compared to 2011, companies will continue to place the greatest focus on variable pay, according to a survey from Aon Hewitt. Aon Hewitt surveyed 1,494 large U.S. companies in June and July, which revealed a 2.9 percent base salary increase projection in 2012 for salaried exempt (employees who do not receive overtime pay), executives, salaried nonexempt (employees who receive overtime pay) and nonunion hourly workers.
The increase is up slightly from 2011 for all groups: salaried exempt (2.7 percent), executive (2.8 percent), salaried nonexempt (2.8 percent) and non union hourly (2.7 percent), and more than a percentage point better than the record-low pay raises workers saw in 2009 (1.8 percent).
"Three percent is the new 4 percent, meaning we are not likely to be back to the 4 percent levels of the late 1990s any time soon," said Ken Abosch, Aon Hewitt's compensation group leader. "Employees should also keep in mind that despite employers anticipating increases, if current economic conditions continue, the 2012 projections may come in lower than anticipated."
The number of companies freezing salaries is down for the second year in a row, and this trend is expected to continue into 2012. In 2011, 5 percent of organizations froze salaries, compared to 21 percent in 2010 and nearly half (48 percent) in 2009. Approximately 4 percent of employers anticipate salary freezes in 2012.
Variable pay plans, or performance-based award programs where the award must be earned each year, reached an all-time high in 2011, with 92 percent of employers implementing this type of program. This is a significant increase compared to 2005, when just 78 percent of employers offered variable pay.
Economic pressures have had a slight impact on variable pay this year, as organizations had anticipated spending 11.8 percent of payroll on these programs for salaried exempt employees. Instead, employers have earmarked 11.6 percent of payroll for variable pay this year. Spending in 2012 is expected to dip slightly to 11.5 percent.
Aon Hewitt's survey also shows the majority (86 percent) of employers will fund variable pay based on company performance, though some are funding it through reduced merit increases and reductions in head count (5 percent each). Just 2 percent of companies are budgeting for variable pay through reduced spending on benefits, while only 1 percent are doing so through pay freezes.
"The growing use of variable pay, along with lower salary increases, represents the new normal in compensation practices for employers nationwide," Abosch said. "This pay mix creates greater motivation for employees to be productive and greater flexibility for employers to compensate based on individual and company performance. However, this does create a need for performance discussions throughout the year, so employees know what they are doing well and areas for improvement in order to maximize productivity and potential pay opportunity."
According to Aon Hewitt's survey, salaried exempt workers in some U.S. cities can expect to see salary increases higher than the national average in 2012. These cities include Detroit (4.0 percent), Dallas (3.4 percent), Chicago (3.0 percent), Houston (3.0 percent) and Milwaukee (3.0 percent). Cities that can expect lower-than-average increases in 2012 include Washington, D.C. (2.8 percent), New York (2.7 percent) and Philadelphia (2.7 percent).
The industries that can expect to see the highest salary increases in 2012 include, energy/oil/gas (3.6 percent), real estate (3.6 percent), construction/engineering (3.5 percent), telecommunications (3.2 percent) and not-for profit (3.2 percent). The lowest increases are projected to be in government (1.7 percent), building materials (2.5 percent), research/development (2.5 percent), rubbers/plastics/glass (2.6 percent) and education (2.6 percent).