U.S. Workers Can Expect to See Slight Recovery in Salary Increases for 2010; Variable Pay to Remain Stable

While the economic downturn prompted U.S. companies in 2009 to grant employees the lowest base salary increases in 33 years, funding for variable pay was at an all time high, according to a recent survey by Hewitt Associates, a global human resources consulting and outsourcing company. For 2010, employees can expect to see a similar mix of compensation payouts, with variable pay budgets projected to remain stable and base salary increases rising only slightly.

Hewitt’s survey of 1,156 large organizations reveals that base salary increases dropped below 3 percent for the first time since Hewitt started tracking the data in 1976. Base salary increases for salaried exempt employees¹ in 2009 were just 1.8 percent and are expected to inch up to 2.7 percent in 2010. Executive employees are projected to receive increases of 2.6 percent in 2010 compared to 1.4 percent in 2009. Salaried non-exempt employees² can also expect an increase of 2.6 percent in 2010, up from 1.9 percent in 2009. Salary increases for nonunion hourly and union workers are projected to be 2.7 percent in 2010, compared to 2.0 percent and 2.2 percent respectively in 2009.

The challenging economy also compelled nearly half (48 percent) of companies to freeze salaries in 2009, up considerably from 2 percent in 2008. In 2010, 13 percent of companies anticipate salary freezes. More than two-thirds of companies planning a freeze next year also had a freeze in place in 2009.

Historical Overall U.S. Salary Increase Budgets

“Even during past economic downturns, we have not seen such dismal salary increases as we did this year – it truly is unprecedented,” said Ken Abosch, leader of Hewitt’s North American Broad-Based Compensation Consulting business.

Variable Pay Highest on Record

While base pay increases hit an all time low in 2009, Hewitt data shows that variable pay spending has been steadily growing over the past decade. Fifteen years ago, variable pay spending accounted for approximately 5 percent to 6 percent of payroll. Today spending on these types of compensation programs is almost twice that level. For example, spending on variable pay as a percentage of payroll for salaried exempt workers was 12.0 percent in 2009, up from 6.4 percent in 1994. In 2010, companies are budgeting variable pay bonuses at 11.8 percent.

Historical Spending on Variable Pay

”Even in the toughest economies, companies are willing to reserve money for top-performing employees as a way to reward their performance and ensure they retain these employees after the job market rebounds,” adds Abosch. “Over the past decade, we’ve seen companies steadily shift from a fixed pay model to one that emphasizes true performance-based awards, and we expect this trend will continue.”

2010 Salary Increases by Industry and City

Hewitt’s survey revealed that workers in some major U.S. cities may see higher salary increases in 2010 than the national average. These cities include Houston (3.4 percent), Minneapolis/St. Paul (3.0 percent), Washington DC (3.0 percent), and Des Moines (2.9 percent). The cities projected to have the lowest increases next year are Detroit (2.1 percent), Los Angeles (2.2 percent), and San Francisco (2.4 percent). The attached chart has more information on projected salary increase levels for select cities.

Industries projecting above average salary increases in 2010 include energy (3.7 percent), and food/beverage/tobacco (3.1 percent). The industries with the lowest expected increases are industrial machinery/equipment (1.6 percent), education (2.0 percent), and automotive/vehicle manufacturing (2.1 percent).

“Regional salary increase trends are largely driven by factors, including economic conditions, demographics and market issues, so it’s not surprising to see lower-than-average salary increases in industries and cities with high unemployment levels or that have been significantly impacted by the economy,” added Abosch.

About Hewitt Associates

Hewitt Associates (NYSE: HEW) provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com.

¹ Salaried exempt: All non-executive salaried employees for whom overtime pay is not required by the Fair Labor Standards Act (FLSA).

² Salaried nonexempt: Salaried employees for whom overtime pay is required by FLSA.

³ Hewitt’s annual survey does not historically collect this data for the executive group.

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Hewitt Associates
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