Average salary increases for U.S. workers in 2014 are expected to reach their highest levels in six years, before the Great Recession took full effect, a recent analysis shows. In particular, jobs in a select few manufacturing sectors are expected to benefit.
But Aon Hewitt says the average increases for most professions are projected to remain modest. The reason, officials say, is because employers continue to be conservative in their cost outlook and have shifted their focus to providing performance-based awards for high-performing workers.
So while the organization’s findings show salary increases have inched upwards year-over-year – after plummeting to an all-time low of 1.8 percent in 2009 – its most recent analysis, the U.S. Salary Increase Survey of 1,147 companies, found that salaried exempt workers are projected to see base pay rise 3.0 percent in 2014, a slight increase from 2.9 in 2013.
If it materializes, it would be the highest level reached since 2008, when salary increases were at 3.7 percent for salaried exempt employees.
This means that while pay levels are gradually rebounding, they’re still far below pre-recessionary levels, says Ken Abosch, compensation, strategy, and market development leader at Aon Hewitt.
Why are the increases so modest? A couple reasons, he tells Industry Today.
“First of all, there is still a tremendous amount of pressure on organizations to keep costs down in order to stay competitive globally,” Abosch says. “Secondly, there is really no pressure in the marketplace from a supply and demand standpoint that requires organizations to pay more in salaries.”
He adds, “The third reason is salaries represent a fixed cost to organizations. When you give somebody a dollar of increase to their salary, that’s a dollar they keep, and it compounds to other benefits and so on until that person leaves the organization, either, hopefully, through time or for some other reason. For most organizations, including many in manufacturing, that fixed cost represents, if it’s not their highest cost of doing business, it’s their second or third highest investment category. There’s not going to be a lot of desire to increase that cost category.”
Abosch says the same projection, a 3.0 percent average wage increase countrywide, was projected for 2012, but “there was a slight pullback” and the increase never reached that mark.
“It’s a similar expectation to what organizations described for 2012 but ended up falling back and falling short on in terms of their ability to deliver on that,” he tells Leo Rommel of Industry Today. “Three percent would represent the highest over that six-year timeframe. However, prior to the recession, it would also have represented the all-time low in 37 years of tracking this data.”
JOBS WITH BETTER INCREASES
The industries that can expect to see the highest salary increases in 2014, according to the aforementioned analysis, include:
- Energy, oil, and gas – 3.9 percent;
- Construction and engineering – 3.5 percent;
- Mining, milling, and smelting – 3.3 percent.
Abosch says there are a couple of theories as to what’s going on with regard to this trend.
“First of all, there are a few industries that have been, let’s just say, perennial leaders of the pack over the last several years,” he says. “Energy is one. Mining and milling is another. Those, in particular, have been pretty aggressive over the last couple years.”
Consequently, he adds, these industries are experiencing substantially higher profit margins.
“Mining, the cost of precious metals has been increasing significantly. Energy, we can talk about the cost of gasoline. There are nice margins in those industries, and those have been getting passed down to employees,” Abosch says.
However, in the other noted industries – particularly construction, engineering, and metals and fabrication – the notable projected increases may be “more of an attempt to recover from some tougher years,” he adds.
“Several of those industry categories were actually depressed in the last two or three years,” he explains. “This may be an effort to attempt some recovery and normalization. Also, some of those industries are highly cyclical and many of them are in positive areas of their cycles right now, and so I think that may also be a factor.”
When asked if the above professions’ salary increases have benefited from the U.S. shale boom, Abosch says, “Yes, I think there has been some upward impact from that.”
He adds, “We can infer that there has been some impact there. In particular, for example, if you look at the salary increase statistics for Denver or for Colorado, where a lot of that oil shale fracking is going on, that has elevated, actually, the salary increase activity in those locations.”
Sure enough, Denver ranked high on Aon Hewitt’s list of U.S. cities whose workers would likely see salary increases north of the national average of 2014. Denver was projected to see a 3.2 percent average rise, tied with Kansas City for No. 1. In contrast, cities than can expect lower-than-average increases include Boston, at 2.8 percent, and New York, at 2.8 percent, cities where there is generally less manufacturing activity.
Will these manufacturing sectors continue to see such handsome wage increase? That, Abosch says, is “the million-dollar question.” While he’s not quite sure, he still offers something of a forecast for the years to come.
“I’ll give you two perspectives on this. One is we don’t expect much upward movement in these numbers for any of these industry categories,” he says. “When we talk about the 3 percent average nationally, I would not expect to see much movement occurring in the next few years because of limited budgets, pressures to contain costs, and the need of most employers to continue focus on rewarding top talent.”
REWARDING TOP PERFORMERS
Aon Hewitt’s survey shows employers would like to allocate a majority of their salary increase budgets towards high-performing workers.
In 2013, top performing workers, according to the organization’s study, saw average increases of 4.7 percent, almost two times the amount of the average worker, recognized as those who met expectations. Those workers saw a 2.6 percent average increase.
Employees who did not meet expectations received average increases between 0.2 percent and 0.9 percent, Aon Hewitt reported.
“With conservative budgets and increasing pressure to attract and retain the best talent, companies are still being overly generous towards workers who are underperforming,” Abosch says. “We think this often undermines the effectiveness of their pay-for-performance messaging by watering everyone’s increases down. Instead of rewarding low-performers, organizations should reallocate that money towards those who have helped achieve strong results.”
An increasing number of companies, Aon Hewitt says, continue to use broad-based variable pay programs – or performance-based awards that must be re-earned each year – as a way to reward top-performing talent.
More specifically, 90 percent of companies offer a broad-based variable pay plan and expect to spend 12.0 percent of payroll on variable pay for salaried exempt employees in 2014, study results show.
According to Abosch, this is up significantly from a decade ago, when just 78 percent of companies offered such a program, with an average increase of 9.5 percent of payroll.
“Variable pay is a variable cost, not a fixed cost, so organizations like variable pay because it helps create focus amongst their employees, and they only incur expense when they actually have performance to base that on,” Abosch says. “When they do incur that expense, it’s a variable expense, so it’s here today and gone next year.”
About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement, and health solutions. The organization advises, designs, and executes a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefining health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.