Spending on variable pay begins to rebound

Hewitt surveyed 1,185 companies nationwide, and found that average salary increases for 2004 are consistent with 2003 and represent some of the lowest increases ever recorded in Hewitt’s 28 years of gathering and analyzing this type of data.

Specific increases averaged 3.4 percent for salaried exempt employees, 3.3 percent for salaried nonexempt employees, 3.3 percent for nonunion hourly workers and 3.7 percent for executives. Meanwhile, 3 percent of organizations implemented a salary freeze this year, but less than 1 percent believe they will take this action in 2005.

Salary increase projections for 2005 are slightly higher, with estimates of 3.6 percent for salaried exempt employees, 3.5 percent for salaried nonexempt employees, 3.5 percent for nonunion hourly workers and 3.8 percent for executives.

However, these estimates are down from 2001, when base salary increases were as high as 4.3 percent for salaried exempt employees, 4.2 percent for salaried nonexempt employees, 4 percent for nonunion hourly workers and 4.5 percent for executives.

“We may never see base salary increases in the mid-to-upper 4 percent range again,” said Ken Abosch, a business leader for Hewitt Associates, in a Hewitt news release.

“Cost containment is still a focus in 2004, which led to a status quo in base salary increases. And, while we expect salaries to rebound a bit in 2005, most organizations continue to place greater emphasis on performance-based programs, such as variable pay.

These programs should continue to grow in popularity and potential payout for years to come.”

Variable pay programs

Hewitt’s study also revealed that 79 percent of companies believe variable pay programs help improve their business results, while 21 percent say that they have no effect on their results.

In fact, while salary increases remain low, variable pay (performance-related awards that must be re-earned each year and do not permanently increase base salary), continues to increase.

According to Hewitt, 78 percent of surveyed organizations have at least one type of broad-based variable pay plan, which is consistent with last year (77 percent) and up from 1995 (59 percent).

Organizations are also spending more money on variable pay programs, averaging 9.5 percent of payroll in 2004 and projected to average 9.9 percent in 2005 for salaried exempt employees. This is an increase from 2003, when variable pay spending was 8.8 percent of payroll, but lower than the record high in 2001 of 10.8 percent (see chart).

The most common types of variable pay plans in 2004 are:

• Business Incentives (63 percent) – awards employees for a combination of financial and operational performance measures for the company, business unit, department, plant and/or individual performance;

• Special Recognition (55 percent) – acknowledges outstanding individual or group achievements with small cash awards or merchandise (e.g., gift certificates);

• Individual Performance (43 percent) – rewards based on specific employee performance criteria; and

• Stock Ownership (30 percent) – rewards stock to professionals who meet specific goals.

“Variable pay programs can be a ‘win-win’ for both the employee and employer, but to be effective, they require regular monitoring and communication,” said Abosch.

“Companies should evaluate these programs annually to ensure they are meeting their objectives. Regular communication with employees also is important so they realize how they are doing against their objectives.”