Salary increases over the past five years have been steady at roughly 3% per year, even as inflation has varied considerably over the same time period. Although companies have raised merit budgets compared to the recession years of 2009 – 2011, pay changes have not recovered to pre-recession levels. Prior to the recession, salary budget increases ranged from 3.8% to 4.6% during 1999 – 2008 (World at Work Annual Salary Budget Surveys).
Are there reasons to believe that 2019 may finally be different? A recently published World at Work survey of salary increases projected that the average salary increases across all employee types will be 3.2% for 2019. It is worth noting that while this survey had a robust data set of about 5,500 submissions, the survey closed in May 2018. This means that participants in the survey were estimating their 2019 increases well in advance, and the actual pay changes may be different, as there is still a lot of time remaining in 2018.
In spite of near record low levels of unemployment and the recent passage of sweeping tax reform, projected pay changes for 2019 are not all that different from the 3.1% average increase that workers received in 2018. Inflation rates are on an upward trend in recent years, so the real annual pay increases when inflation is factored in are quite small. In fact, the inflation rate for the 12 months ended in June 2018 was 2.9%, so when compared to 2018’s average pay increase of 3.1%, that comes out to a real pay increase of just 0.2%.
The table below shows the average pay increases for each employee type since 2009 compared to annual inflation levels:
Sources: World at Work Annual Salary Budget Surveys 2009 – 2018 and the Bureau of Labor Statistics
The chart to the right shows a graphical comparison of salary increases to increases adjusted for inflation. Salary increases have shown little variance over the decade, hovering near 3%. When salary increases are adjusted for inflation, a totally different picture is shown. Real pay increases (after adjustment for inflation) have actually been closer to 1% with a few exceptions. It is worth noting that in 2011, the real pay increase was actually -0.4%, which means that many workers’ buying power diminished, despite receiving a pay increase.
The table to the left shows that real pay increases over the last decade have been quite low relative to historic levels. The Economic Research Institute (ERI) recently posted an analysis of how real salary increases have varied over the past several decades, calculated as the percentage of salary increase budgets less the percentage change in the CPI through 2016. The results show that real pay increases have been declining, and are down nearly a full percentage point since the 1980s.
If pay raises aren’t doing much to outpace inflation, workers may view their compensation packages as stale and may seek better pay elsewhere — especially during periods of low unemployment. A May 2018 survey of over 1,000 workers in sales, office, management and professional occupations by Accounting Principals and Ajilon Research & Insights found that 43% of respondents would be enticed to leave their company if offered better pay by another company. Perhaps unsurprisingly, the survey found that workers aged 18 to 25 were most likely to leave for increased pay, while those over 55 were the least likely. Additionally, the unemployment levels for professional and managerial employees are low compared to other employee classifications, which suggests that these positions have ample opportunities to change jobs for better pay opportunities.
Current unemployment levels are quite low, no matter which measure is used. According to the Bureau of Labor Statistics, the June 2018 U-3 (official unemployment rate) was 4.0%, while the U-6 (sometimes called the “real” unemployment rate) was 7.8%. In addition to metrics like the U-3 and U-6 unemployment rates, other metrics point to a tight labor market. In May 2018, the number of job openings was greater than the number of job seekers for the first time ever, with a ratio of 0.9 unemployed workers per job opening.
While pay increases in 2019 are projected to be the largest in the past decade, they are only slightly larger than in 2018. With low unemployment levels and the possibility that upward trends in inflation continue through the remainder of 2018, there are reasons to speculate that pay increases may be greater than the early survey results would indicate. We would not be surprised if pay increases for 2019 end up being at or above 3.5%, rather than the 3.2% indicated by the World at Work survey.
Pay Strategies for Companies Going Forward
Companies may consider different approaches as the pace of compensation changes picks up.
1. Employers should consider potential wage changes differently for different segments of their workforce. The historical data suggests that higher-paid jobs have seen greater pay increases than lower-paid jobs. Whether this is a socially appropriate strategy is a separate question.
2. Track new hire rates in comparison to wages paid to current employees. You might see signs of increasing wages that should be reflected in next year’s merit budget. There are a few software programs such as PayFactors that can provide more current pay data than salary surveys.
3. Companies should ensure their salary management systems are externally competitive. No organization wants to lose its high performers to competitors because its pay isn’t competitive with the market. Target your high performers for higher increases.
4. This is a great time for companies to consider a variable or incentive pay plan to complement their base pay programs. Utilizing incentive pay has the advantages of not increasing fixed costs and ties potential rewards to desirable business outcomes.
5. Although competitive wages are certainly an important reason employees remain with organizations, they are not the only reason. Companies should consider enhancing their efforts in career growth and performance management, building an engaging company culture, and providing work/life balance. These factors are most significant in retaining employees.
Dan Steele and Joe Kager of the POE Group