Employee pay—both base salary and incentives—is every employer’s best weapon when it comes to attracting, retaining and motivating employees. If you don’t offer enough, you won’t bring key employees in the door and you certainly won’t make them stay. Unfortunately, a major recession and subsequent slow recovery have severely limited the resources companies have been willing and able to funnel into base pay increases and higher incentive targets. In this case, the numbers tell the story. Since 2008, base pay increases made a sharp dive as they all but disappeared during the recession then slowly climbed back to right around 3%, give or take a few tenths of a percent. What base salary increases have not done is return to their pre-recession levels. Moreover, according to an analysis by Towers Watson, this fact is not surprising. The analysis looked at salary budget increases at the beginning and end of the last three recessions (1990-1994, 2000-2002, and 2008-2011) and found that, in all three cases, post-recession salary budgets remained significantly below pre-recession levels. In essence, those recessions created a new and lower ceiling for pay increases. The salary budget numbers for 2013 show no sign of breaking that pattern. The consensus from various salary surveys this year indicate that salary budgets will continue to hover around 3%, compared to the 3.7% Towers Watson reported for 2008. The findings of an online poll of 150 companies conducted by WorldatWork and compensation consultants Pearl Meyer & Partners reinforce this, with most respondents expecting the modest salary budget increase projections to hold true this year. Pearl Meyer managing director Jim Hudner calls this situation the “new normal” that features “very modest salary increase budgets, more use of variable pay, and compensation dollars focused on key roles, functions and high performers.” In an effort to do more with less, the survey respondents also noted that they will attempt to use the salary budgets they have available to target increases toward those key employees who have a significant impact on company performance. The survey found that 65% of companies expect to differentiate pay levels among various employee populations. Only half of companies reported this approach in a similar 2011 survey. In addition, companies are expanding performance-based variable pay plans to more employee groups. One-fifth of responding companies said that they plan to expand eligibility incentive and bonus programs and/or increase award levels for these programs. Given the widespread nature of this compensation challenge, we will be starting a periodic series of posts covering specific compensation challenges and solutions. The first part of the series will focus on forging a stronger link between pay and performance, including the root causes of weak links and how to address them. In the coming months, we will explore more ways to reward strong performers and rising stars, as well as how to make sure companies are paying the market rate for talent. Stay tuned.