Hewitt: 2006 Pay to Stay Mostly Flat over 2005

August 31, 2005 (PLANSPONSOR.com) - A new Hewitt Associates survey paints a somewhat grim picture of the predicted salary outlook for next year.

A Hewitt news release said that while base salary increases aren’t projected to drop in 2006, they also aren’t expected to improve much and rising health care and energy costs will likely eat up any gains.

Hewitt’s survey of 1,056 large organizations found that salaried exempt employees can expect base salary increases of 3.6% next year – the same as 2005. Executive employees are projected to receive 2006 increases of 3.8%, compared with 3.6% for salaried non-exempt, 3.5% for non-union hourly and 3.1% for union employees.

“Companies are struggling to attract and retain key talent with relatively flat pay increases, while at the same time employees’ pay checks are continuing to shrink due to increasing health care and energy costs,” said Ken Abosch, a business leader for Hewitt Associates, in the news release. “The real challenge for companies is finding real and meaningful ways to reward their top performers without additional money in traditional base pay budgets. For many, that’s going to take creativity and a heavier reliance on variable pay.”

Hewitt’s study shows that workers (salaried exempt) in some major US cities should realize salary bumps somewhat higher than the national average projections for 2006, including Los Angeles (4.3 %), San Francisco (4%), Washington D.C. (3.9 %), and Houston (3.9%).

While base salary increases remain stable, Hewitt’s survey shows increased activity in the area of variable pay, as companies rely more on bonuses as a primary means of attracting, motivating and retaining key talent. Variable pay has continued to grow in prevalence since the early 1990s, with 78% of responding companies currently offering at least one type of broad-based variable pay plan, compared with 51% in 1991.

In 2005, actual company spending on variable pay as a percentage of payroll increased to 11.4%, up from 9.5% in 2004 and exceeding 2005 projections by 1.5%. Spending on variable pay in 2006 is projected to remain strong at 11.1%.

According to the survey, business incentives are the most common award (64%), followed by special recognition awards (55%), individual performance awards (45%) and non-executive stock options/ownership (28%).

Given low pay increases, attraction and retention issues continue to be a sore spot for a number of companies, with 42% reporting problems in attracting or retaining key talent. To retain top performers, 77% of companies make pay equity adjustments to bring them more in line with market pay rates. In addition, companies are more often turning to flexible work arrangements (52%), retention bonuses (41%), stock awards (30%), part-time work options (30%) and a host of smaller bonuses and awards.