As businesses bolster hiring in the recovery, compensation advisory companies say managers will have to increase their budgeting for salaries and bonuses ”“ with variable, pay-for-performance compensation gaining currency.
With the economy showing some signs of improvement, U.S. companies are planning to hike pay 2.7 percent on average next year from 2.3 percent this year and 1.6 percent in 2009 according to a survey of more than 1,000 companies conducted by Towers Watson Inc., a New York City-based human resources consultancy with a large office in Stamford.
What”™s more, while nearly a third of companies froze salaries in 2009, that number had dropped to 12 percent this year and is expected to comprise just 5 percent of businesses next year.
“As the economy continues to emerge from the recession, the compensation environment for most companies is looking much better,” said Laura Sejen, global rewards practice leader at Towers Watson, in written comments. “Companies are steadily restoring frozen pay increases and are now in an improved position financially to reward their workers with higher raises and bonuses.”
Rewarding performance
Employees can also expect to receive larger annual bonuses this year as organizations return to profitability, with Wall Street bonuses under particular scrutiny each year in Fairfield County for the trickle down spending they produce for area auto dealers, luxury retailers and others.
“With many companies reporting stronger profits and higher revenues this year, companies will have more resources available to fund bonuses and potentially reward employees with larger bonuses than they have received in the past few years,” Sejen said.
While Towers Watson did not break down its results by regions of the country, a separate study by Compdata Surveys determined that budgets for Northeast manufacturers are up 2.5 percent this year, the highest rate in the nation. The Kansas City, Kan.-based company said pay advanced only 2.2 percent last year at Northeast manufacturers and predicts a 2.8 percent jump next year.
“It”™s moving at a slow pace, but it is increasing,” said Amy Kaminski, director of marketing for Compdata Surveys.
For companies that can do so, more are differentiating increases based on performance, Towers Watson found. This year, below-average performers will receive median merit increases of just 1.4 percent, versus 2.6 percent for those with average performance ratings, and 4.3 percent for stars.
“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.
LTI grants
Pay raises globally were at an all-time low last year, according to Hewitt Associates, a Lincolnshire, Ill.-based human resources consultancy with a large office in Norwalk that is being acquired by Chicago-based Aon Corp. Hewitt said companies continue to allocate a greater portion of their compensation budgets toward variable pay programs aimed at rewarding or retaining high-performing workers.
For senior executives, Hewitt recently calculated a 23 percent increase in the value of long-term incentive grants in overall compensation packages this year, against the 20 percent decline in LTI grants that occurred in 2008 and 2009.
“As stock prices declined, many companies were forced to reduce their LTI grants in 2008 and 2009,” said David Hofrichter, business development leader in Hewitt”™s executive compensation consulting practice, in a statement. “Companies that review 2009 proxy data will see this trend continuing. But when you analyze (SEC) Form 4 data ”“ which provides a more accurate picture of what”™s really happening in the market ”“ you”™ll see that companies have started beefing up LTIs again in 2010.”
