Pay Hikes on the Way Up

August 4, 2010 ( – A Towers Watson Data Services survey found that companies are projecting merit increases of 2.7% for 2011, an increase from 2.3% this year and 1.6% in 2009.

A Towers Watson news release said the survey also found that the number of companies freezing salaries is declining. While 32% of companies froze salaries in 2009, the percentage decreased to 12% in 2010 and is expected to drop to only 5% in 2011.

In 2010, workers who have below-average performance ratings will receive 1.4% median merit increases while those with average ratings will get a median 2.6% increase, and workers who have the highest performance ratings will receive a 4.3% increase.

“The improving economy also means that employees, and especially talented ones, may soon start testing the labor market, placing added pressure on employers,” said Laurie Bienstock, North America rewards practice leader at Towers Watson, in the news release. “Rewarding their best-performing employees with above-average raises will certainly help their efforts to not only retain their talented employees but also keep them fully engaged.”

A separate Towers Watson survey of 314 companies found that companies’ average projected bonus funding for the current-year performance is 92% of target, a 12% increase over the prior performance year. The last time most companies were able to fully fund annual bonuses was 2007.

Driven by variances in the health of the overall economy, there are significant differences in merit increase budgets by region. Employees who met expectations in China and India received an average base pay increase of 8.8%, while organizations in Ireland and Spain provided employees who met expectations with an average merit increase of 1.6%.

The degree to which companies differentiate increases based on performance also varies significantly. While they have the lowest merit budgets, Ireland and Spain report the greatest levels of merit differentiation. Companies in these countries report more than a 300% differentiation between increases for employees who far exceed expectations (top performers) and those who meet expectations (average performers). Differentiation across other regions ranges from 200% to 260%.

Although there are signs of increased organizational profitability, companies outside the United States and Canada appear to be cautious in their annual bonus pool funding and are keeping their projected funding levels similar to last year. The survey found that companies that have outperformed their peers are reducing their expected payouts this year relative to their target payouts, while those that have performed poorly in the past are increasing their payouts.

The Towers Watson Global Talent Management and Rewards Survey was conducted in May and June of 2010 and includes responses from 1,176 companies globally, including 314 from the United States.