Businesses in the U.S are relying less on salary increases and more on incentives such as year-end bonuses to retain employees without boosting fixed costs, a new survey has said, as 2006 turns out to be a year for only modest pay raises.
The survey by Mercer Human Resource Consulting also warned workers would likely find inflation eating up whatever pay increases they received.
U.S. employers were planning to increase base salaries by 3.7 per cent this year, it said, just slightly higher than the average 3.6 per cent rise they granted in 2005.
If these projections played out, workers' wages could fall behind creeping inflation, it added – with the Labor Department's overall Consumer Price Index on course for a 4.7 per cent rise this year, against 3.4 per cent in 2005.
Pay raises next year are expected to stay at 3.7 per cent, it added.
Of the 950 employers surveyed by Mercer, representing nearly 12 million workers, about 85 per cent said they planned to offer short-term incentives this year.
A quarter said they increased the number of employees eligible for cash awards and a quarter said they were giving bigger awards.
Only about 5 per cent decreased the number of employees eligible and the amount of cash given.
"Once I give you a salary increase, it sticks. But with incentives, you have to re-earn it every year. Companies are very reticent about fixed costs these days," said Steven Gross, a senior consultant at Mercer and employee compensation specialist.
Mercer's data echoes projections published last month by not-for-profit research body the Conference Board.
It said pay rise by 3.5 per cent this year and next, while inflation would grow by 3.1 percentage points this year and 3.3 percentage points in 2007.
Modest pay increases have been a trend for the past several years – hovering between 3.3 and 3.8 per cent since 2002, according to Mercer's data.
Companies were wary about raising pay because of rising costs, Mercer's Gross said.
Several companies' recent quarterly earnings reports have cited high costs, especially for energy, as hurting performance.
"Companies are still struggling with the ability to raise prices. To raise salaries, they have to be more productive or pass the cost onto the consumer," Gross said.
Companies had met price pressures almost exclusively by squeezing base salaries, said Jared Bernstein, senior economist at the Economic Policy Institute, a union-funded think tank.
"Employers know that a bonus is for now, whereas a base pay change is forever," Bernstein said.
Another increasingly popular way employers deal with labour costs is by differentiating pay increases, Gross said.
They gave high performers on average a 5 per cent pay increase, twice the average raise for low performers.
Rising benefit costs have also crimped employers' ability to commit to big pay raises.
"Benefits are a very important ingredient. Healthcare, also retirement benefits – they're very expensive. Companies are limiting salary increases to offset some of the increases in these benefits," Peck said.
Salary increases in the coming years will rely mostly on the economy's performance – whether hiring will heat up, which will lead employers to raise base pay to stay competitive, and whether growth can keep up with inflation, Gross added.