Research Shows Increase in Variable Pay Programs

August 21, 2007 ( - New research from Hewitt Associates shows modest base pay increases in 2008, but a sharp increase in variable pay programs.

The survey of 1,007 large organizations reveals that base salary increases for salaried exempt employees will inch up to just 3.8% in 2008, compared with 3.7% this year, Hewitt said in a press release. Executive employees are projected to receive increases of 3.9%, compared with 3.7% for salaried non-exempt and non-union hourly employees, and just 3.3% for union employees.

On the other hand, variable pay bonuses – performance-related awards that must be re-earned each year – are projected to hit a record high in 2008 and could reach more than 12%, according to the release.

“Increasing cost pressures, coupled with the challenges of attracting and retaining top talent, have contributed to a fundamental shift in the way employees have been – and will continue to be – rewarded and motivated,” said Ken Abosch, leader of Hewitt’s Compensation Consulting business, in the announcement.

The research found that more than 90% of companies currently offer at least one type of broad-based variable pay plan, up from 80% in 2006 and just 51% in 1991. In 2007, actual company spending on variable pay as a percentage of payroll was 11.8%, up from just 8.8% in 2003. Spending on variable pay in 2008 is projected to be 11.6%.

Special recognition awards continue to be the most common award offered by employers (63%), according to survey results, followed by business incentives (59%), individual performance awards (44%), non-executive equity awards (44%) and retention bonuses (38%).

By city, Washington, D.C. (4.9%), Houston (4.6%), Dallas (4.1%), Denver (4.0%), Los Angeles (4.0%) and New York City (3.9%) are projected to have the highest base salary increases next year. The cities projected to have the lowest increases next year are Detroit (3.4%), Atlanta (3.6%) and Philadelphia and San Francisco (3.7% each).

By industry, accounting/consulting/legal (4.9%), energy (oil/gas) (4.5%) and construction/engineering (4.4%) show higher than average projected increases for 2008. The lowest average salary increases are projected to be in the automotive (3.1%), forest and paper products/packaging (3.4%) and medical devices (3.4%) industries.

Other key survey findings include:

  • Less than 1% of companies reported a salary freeze in 2007 and none expect a salary freeze in 2008.
  • More than 80% of responding organizations feel they effectively differentiate pay based on individual performance.
  • Approximately two-thirds (65%) of companies indicated that high potential/ top performers make up only 11% or less of their workforce.