When Annual Increases Disappear

As regular annual increases have disappeared, the economic realities of pay planning in the U.S. may have come full circle.  The present new normal looks a lot like the distant past. 

Median salary increases in the 1960s were in the 2% range and not everyone could expect a raise every twelve months.  Not until after the hyperinflation following the wage controls of 1974 did white-collar workers in the U.S. begin to assume and anticipate a wage bump each year.  Labor contracts usually provided for tiny annual increases, but non-union workers had no general expectation of a raise every year.  In those prior decades, salary increases would frequently occur at two-year intervals.  Many standard merit increase grids and budget systems allowed for 18-month intervals for nominal performance. Annual increases only became the norm during the later years of economic expansion and tight labor markets when competitive pay increased at double-digit rates.  Those days ended before most millennial compensation analysts were born.

Today, management committees find it almost impossible to justify large general pay increases.  Most industries are growing slowly, if not still contracting.  Cost inflation has been very low in recent years, putting minimum pressure on income growth patterns.  Lots of experienced workers are unemployed; many are so desperate for work that they will accept entry rates far below the minimums paid to current employees.  Surveys show that replacement costs are dropping steadily in many occupational categories.  All these factors combine to argue against giving pay raises in any but the most critical scarce-skill cases.

The economic conditions of 2012 weigh heavily on top executives with fiduciary responsibilities.  That means they have legal obligations to conserve and wisely handle the money of the owners or shareholders.  Wasting profits on unnecessary pay increases would be a form of professional suicide.  It also might bring a shareholder lawsuit.

When your people accept the unhappy notion that pay raises won’t happen soon or often, getting permission to grant an individual increase is a real challenge.  It is not easy to convince executives who have been denied increase budgets for their outstanding employees that YOUR person is an exception.   Substantial proofs must be accepted that Sally Smith holds unique talents vital to the enterprise, has no backup and is at risk of being recruited away.  And even if you successfully make that case, it still becomes quite difficult to break the established precedent of “no raises” and give one to her when you have denied the same treatment to scores of others. Once the expectations of regular increases have been tempered, doing anything different seems hypocritical.  Cries of “unfair” will fill the air.

People would prefer that their company felt that it owed each person an automatic increase each year.  Failing that, workers would like their employer to believe that they personally deserve a raise.   Unfortunately, neither of those outcomes appears particularly likely to happen now at most organizations.  That leaves the typical compensation person in the position of being forced to operate as a cost control cop.  Holding the line against the self-interest of employees and their managers (whose self-interest is also served by granting large raises) is a daunting task for even the most skilled and experienced compensational professional. 

Knowing the background to the circumstances that created your situation doesn’t solve the problem, but sometimes it does make it easier to cope with the challenge.  Let’s hope that this storyboard helps create context and content for tradecraft survival and eventual continued growth and prosperity.  After all, the more effectively compensation people operate, the sooner that full recovery will take place.

E. James (Jim) Brennan  is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), and will express his opinion on almost anything.

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Comments

[Leah]

The prelim WorldatWork annual salary increase survey just came out yesterday and looks pretty much like last year with 3% merit and total increases budgeted across all employee categories. Do you think this will change by the time the final version comes out, with companies pulling back on this 3% and only providing increases to critical groups of employees - hi-pos, high performers, hard to fill, skill shortage jobs? Do you have any other specific materials to reference to help us support this case? The annual surveys are a bit of a chicken/egg situation - many want to know what the surveys say before modeling their budgets.

[E. James (Jim) Brennan]

Yes. It is ironic that those quickest to proclaim, "we are unique," are often the first to demand guidance on consensus practices before deciding their "unique" posture. That said, those who conduct continual evergreen pay increase surveys see the metrics for the next twelve months declining by about one-tenth every quarter or so. While hot/critical jobs can rise by double digits, low-skill workers will actually be replaced for less and many people get no annual increase at all. Different industries recover at different times, too. The biggest problem is the surveys that only measure INCREASES and remain silent about those who went without any last year and who may not be budgeted for one in the future, either.

Each ERI Update (http://www.erieri.com/newsletter/_Data/2012/April2012.pdf and the July2012 one out in a few days) gives periodic high-level summaries.

[E. James (Jim) Brennan]

P.S. WorldAtWork just reported that the CareerBuilders Harris poll with 95% confidence level says: “49% of workers reported they have not had a merit increase since 2010. 25% have not had a merit increase since before 2008.” Wow. That informs this discussion. Reality is different for everyone.