U.S. employers largely plan to hold the line on budgeted pay raises in 2020, a report published Thursday by business consulting firm Willis Towers Watson Data Service found. This news comes despite a 19-year unemployment low in the United States.
The survey, which was conducted between April and July, includes responses from 858 companies across industries. Many of the companies, the study found, are projecting slightly larger discretionary bonuses in the coming year, while others are adding promotional budgets to employee salaries in a concerted effort to reward and retain their top talent.
The General Industry Salary Budget Survey found salary increases for non-management employees, management employees, non-exempt hourly employees and non-exempt salaried employees are all expected to continue hovering at about 3%, and 96% of companies surveyed plan to give the same percent raises in 2020 as this year.
Willis found more companies are formalizing their promotional increase budget, which currently stands at 30%, proving a significant increase from 2018. The 3% pay raise statistic has held steady for the past 10 years. The last year that employers provided a larger increase of 3.8% was in 2008.
Rewarding of top employees remains constant. Workers perceived as more valuable receive “significantly” larger pay raises than those considered “average-performing.” The star employees’ average raise increased 4.6% this year and the "average” employees’ raise increased only 2.7%.
Catherine Hartmann, leader of North America Rewards at Willis Towers Watson, shared that, despite the tight labor market, most employers “are either not willing or fiscally unable to increase their fixed costs across-the-board by bolstering their salary budgets.” However, she said many companies are still trying to provide “significantly larger market adjustments to employees in high-skill roles, and selective pay raises to their top performers.” This recognition of the contributions made by employees often come as better annual incentives and higher discretionary year-end bonuses, Hartmann said.
The survey found companies are projecting these discretionary bonuses will amount to about 5.9% of an exempt employee’s salary, up from last year’s average of 5.3%. Discretionary bonuses are also planned for managers and salaried, nonexempt employees. Annual performance bonuses, which are generally tied to company and employee performance goals, are projected to decline modestly for most employee groups compared with bonuses paid last year.
Despite the majority of companies keeping their salary budgets steady, Hartmann notes that the study also found “many companies getting creative with base pay beyond the traditional merit increase.” For instance, a significant number of employers are “carving out increase pools for their high-potential and top-performing employees, setting aside premium pay for highly valued skills.” Even after accounting for low unemployment rates, Hartmann said, some clients are “feeling uncertain about what the market will bear in 2020 and, therefore, continue to be selective on where they spend their compensation dollars.”
Hartmann urges finance executives not to bristle at these numbers, and to recognize the steadiness and consistency of those raise increases.
"There’s a predictability in what those salary increases will be next year, and the year after," she said. "You can have a steadily-paced salary increase budget, but still an increase in overall compensation dollars because you’re spending money in other places. Take a step back and ask what matters to your employee population. Is it pay? Or is it also other types of wellbeing programs like parental leave and elder care assistance? Perks like those can really engage the parts of the employee population that CFOs can’t afford to lose, from a business perspective.”
In terms of applying these findings to your organization, Hartmann recommends CFOs start by analyzing their company, as is.
“In the employee population, two distinct populations exist. The first is the high performers and high-potential employees. The company gets results when people with potential move up in the organization,” she said. “The second population is people with high-demand skills that the company can’t afford to lose. [People skilled in] cyber security, cloud computing, and e-commerce, which are imperative for any growing organization.”
When it comes to these populations, Hartmann said CFOs need to keep up to date with in-demand, high-skill roles from a market perspective, as well as take care of the individuals who are high-performing and have high potential in parts of a business that help keep things running.
“Traditional methods of the past, like 3% bonus, may not be the most creative thing moving forward,” Hartmann says. “CFOs may want to modernize what they’re doing, in order to become a 21st century company when it comes to their human capital approach.” This starts with understanding their vital talent pools and understanding, strategically, where they want to go, she said.
Hartmann highly encourages CFOs to partner with Chief Human Resource Officers to come up with these ideas together; “I always think it’s great when the CFO and CHRO are working in lockstep,” she says. “That always gets the best results.”