Pay increase budgets for U.S. workforces remain relatively flat while pay levels in other parts of the world, particularly developing countries, are ratcheting up. CFOs are likely to have mixed reactions to this news. While flat salary budgets will help companies to manage their workforce costs, flat pay levels are likely to mean flat consumer spending and potentially lower demand for these companies' products and services. Meanwhile, companies that have been pursuing a strategy of global wage arbitrage by moving operations to lower wage countries may need to pick up stakes to even less expensive countries.
Let's look at the numbers. Aon Hewitt's survey of more than 1,300 U.S. companies shows base pay increases for five categories of employees -- executive, salaried exempt, salaried nonexempt, nonunion hourly and union -- and, in each category except for salaried nonexempt employees, increases are relatively flat.
|Source: Aon Hewitt|
WorldatWork's global salary survey shows similar results for U.S. employers, which are at the bottom of the scale globally and tied with Spain at 2.8% and only higher than Japan's 2.6%. The WorldatWork's annual salary survey is based on 4,299 responses from 13 countries representing more than 17 million employees. Although 2012 increases in U.S. companies may not seem particularly high, they are an improvement over the all-time low of 2.2% in 2009. The Aon Hewitt survey measured the 2009 low at 1.8%.
Moreover, the WorldatWork survey notes that the increase in pay budgets over the past three years is attributable less to companies offering larger pay increases than to a decline in the number of companies that are offering no increases because they have frozen their salary budgets. Over that timeframe, the number of companies with frozen salary budgets has declined from one-third in 2009 to just 5% this year.
These low base pay increases are being somewhat mitigated by the growing prevalence of variable pay. A large percentage of companies (82%) in the WorldatWork survey are providing their employees with variable pay opportunities, up slightly from 79% in 2011. The most common metrics for determining these variable pay awards focus on a mix of organization/unit success and individual performance.
The Aon Hewitt survey show a slow but steady increase in the percentage of payroll dedicated to variable pay, at 12% this year and a projected 12.1% next year. Nonunion hourly employees saw the biggest jump in variable pay in 2012, from 5.2% in 2011 to 6% this year. However, that spending is expected to fall back to 5.6% in 2013.
Among developing countries, there is a different story. Three of the four BRIC countries (Brazil, Russia, India and China) are projecting the highest salary increases in the WorldatWork survey. Brazil shows a 7.7% actual increase this year and 7.2% projects for next year. China shows 9.1% increases in 2012 and projects 8.8% next year and India had actual increases of 11.2% this year and projects increases of another 10.7% next year.
For companies that have relied on global wage arbitrage by moving or outsourcing some operations to low-wage countries, this survey shows that the trend toward companies looking beyond China and India as pay jumps in those countries for even less expensive labor in Africa and other Asian countries is likely to continue.
Other countries, including Singapore, Australia, Canada, Germany, U.K., France and Netherlands, report salary increases ranging from 3% to 4.3%.