Spending on Performance-Based Awards to Remain Strong

Aug. 13, 2012 — Salaries for U.S. workers continue rising incrementally as concerns remain about the stability of the global economy, according to a survey from Aon Hewitt. However, workers have the potential to offset low base pay increases through performance-based awards.

According to the survey of more than 1,300 U.S. companies, base pay increases for salaried exempt workers were 2.8% in 2012, up marginally from 2.7% in 2011. Salaries have inched upward year-over-year since 2009, when pay increases reached an all-time low of 1.8%.

Pay increases are expected to rise slightly in 2013. For executives, salaried exempt and salaried nonexempt workers, Aon Hewitt projects base pay increases of 3% in 2013. These findings align with the top-level results of the "WorldatWork 2012-2013 Salary Budget Survey."

"It is unlikely that salary increases will reach pre-recession levels of 4% or higher any time soon," said WorldatWork member Ken Abosch, compensation marketing, strategy and development leader at Aon Hewitt. "Companies are more impacted by the global economy than ever before, as a result organizations continue to be conservative with their spending, but we anticipate that attitude will remain even after the economy rights itself — holding down spending on base pay is the new normal."

According to Aon Hewitt's report, employers continue to offer variable pay, or performance-based awards that must be re-earned each year, as a primary way to drive performance and increase engagement while minimizing their fixed costs. In 2012, 90% of companies offered at least one variable pay program, in line with 2011.

This also aligns with the "WorldatWork 2012-2013 Salary Budget Survey," which found that the percentage of organizations using variable pay grew to 82% this year, up from 79% in 2011. A combination of awards based on organizational/unit success and individual performance continues to be the most prevalent type of variable pay program, according to the association's annual survey.

Overall spending on variable pay as a percentage of payroll continues to rise steadily for salaried exempt workers, according to the Aon Hewitt survey. In 2012, companies spent 12% on variable pay compared to 11.6% in 2011. Spending is expected to rise slightly to 12.1% in 2013.

Nonunion hourly workers saw the biggest jump in variable pay in 2012. As a percentage of payroll, employers spent 6% on variable pay rewards for nonunion hourly workers in 2012, compared to 5.2% in 2011. However, spending is expected to fall slightly to 5.6% in 2013 for this group.

"Organizations are being more strategic with the limited compensation dollars they have to spend," Absoch said. "They are spending less on base pay increases for all workers and, instead, are rewarding high performing workers with larger performance-based awards. This allows them to better control spending, while still providing incentives for their best employees."

WorldatWork Practice Leader Kerry Chou, CCP, agreed with Abosch, asserting that pay for performance should be more heavily underscored given modest salary budgets. "You need to effectively allocate available salary dollars, which could mean low or no raises for marginal performers," he said. "And while this isn't a pleasant conversation for managers to have, in the long run it's easier than losing your stars to the competition and then spending far greater sums to find replacements."

According to Aon Hewitt's survey, workers in some U.S. cities can expect to see salary increases higher than the national average in 2013. These cities include Denver (3.6%); Austin, Dallas/Fort Worth, Detroit and San Diego (3.4%); and Houston and Kansas City (3.3%). Cities that can expect lower-than average increases in 2013 include San Francisco (2.7%), Chicago and Minneapolis/St. Paul (2.8%).

The industries that can expect to see the highest salary increases in 2013 include mining/milling (3.8%); computers/related products and energy (3.6%); and automotive/vehicle manufacturing (3.3%). The lowest increases are projected to be in education (2.5%), rubber/plastic/glass, government and health-care/medical services (2.6%).

Note: Discrepancies in data between surveys are common due to differences in methodologies, survey samples and so on. Please contact the survey provider directly for verification of methodology, sample demographics, analysis techniques and so on. Questions regarding the "WorldatWork 2012-2013 Salary Budget Survey" can be directed to the WorldatWork research team.

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