Mercer: Merit Budgets at 3.3% in '04, 3.5% in '05

July 14, 2004 ( - Pay increases will be the same in 2004 as they were in 2003, but forecasts for 2005 show a slight increase.

US employers plan to grant average pay increases of 3.3% this year, while the outlook is slightly better for 2005, with employers budgeting average pay increases of 3.5% for next year. However, if merit budget projections hold, 2005 will mark the fourth consecutive year pay increases have averaged less than 4%, according to Mercer Human Resource Consulting’s 2004/2005 US Compensation Planning Survey.

Raises will still outpace inflation in 2004, albeit by a much narrower gap.Steven Gross, leader of Mercer’s compensation consulting practice in the US points out during the most of the 1990s, average pay increases hovered about 2% above annual inflation. Now, that gap has closed to about 1%. Gross attributes this movement in part to changing dynamics of the labor market – from an under-supply to an over-supply of talent – and in part to the increased use of incentive pay rather than base pay to reward employee performance.

While merit budgets remained depressed compared to their levels in the 1990s, Mercer notes few employers are freezing pay levels this year. The number of employers reporting salary freezes for one or more segments of their employee population fell to 5% in 2003, from 12% in 2003 and 16% in 2002. Among the five employee categories, executives are most likely to have their pay frozen in 2004.

“With the economy rebounding and the job market growing, few companies can afford to eliminate salary increases for fear of losing talent,” Gross explains. “However, several industries still seem to be struggling to manage costs and/or grow revenues, so we will likely see the continued selective use of salary freezes in these industries.”

The 2004/2005 edition of Mercer’s survey includes responses from nearly 1,600 employers across the US and reflects pay practices for nearly 14 million workers. The survey results are captured for five categories of employees: executive, management, technical/professional, nonexempt clerical/technical, and nonunion hourly. The full report can be purchased at .