A 3% salary increase is not likely to excite a high-performing employee with lots of career and job opportunities. That is why companies are allocating salary increases by performance.
As salary budget projections for 2014 start to come out, it is becoming clear that companies are not making major changes to salary increase levels. At an average of about 3.0% for all positions, salary increases have not yet returned to their pre-recession levels and companies do not seem to be in any hurry to change that.
In fact, this flat growth in salary increases seems to be part of a longer-term trend. Research conducted by consulting firm Towers Watson suggests that each recession has led to a permanent decline in salary increases. Following the last three recessions, salary increase levels never returned to their pre-recession heights once the recovery kicked in:
1990 to 1994:Salary increase budgets declined from 5.5% to 4.0%
2000 to 2002:Salary increase budgets declined from 4.4% to 3.8%
2009 to 2011:Salary increase budgets declined from 3.7% to 2.9%
As you can see, projected average salary increases for 2014 remain at the same level that they were 2011. A Mercer survey of nearly 1,500 mid-size and large U.S. employers found that projected salary budgets would average 2.9% in 2014, while the global WorldatWork survey of 5,207 employers around the world projects increases will average 3.1% for U.S. employers.
Let’s face it, a 3% salary increase is not likely to excite a high-performing employee with lots of career and job opportunities. That is why companies are allocating salary increases by performance. For example, the Mercer survey notes that, using a five-point performance rating scale, U.S. employers have identified about 7% of the workforce as its highest performers. These employers plan to allocate an average salary increase of 4.6% to those employees. By contrast, the lowest performers will receive negligible increases as shown in the table below.
Globally, salary budgets for employers in high-growth developing countries, like China and India, are far outpacing those of companies in more developed countries. The table below shows how average salary increase budgets vary by country. The high-growth economies of China, India and Brazil far outpace the developed countries of North America and Europe, with salary increases in India in the double digits.
These are just the first salary surveys to be released this year. As other surveys come out, we will highlight the most interesting findings.