Pay freezes to end in 2010, says Mercer

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Contact: Alistair Peck
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Pay freezes to end in 2010 but recession creates ‘new normal’ in staff rewards, says Mercer

United Kingdom
London, 5 November 2009

Companies optimistic that 2010 will herald the end of pay freezes
Cash unlikely to be king in 2010 as companies alter human capital reward plans

New data issued by Mercer suggests that the trend for companies to freeze pay is unlikely to continue in 2010 as optimism about the economic recovery gathers pace. The data comes from Mercer’s Salary Indicator (MSI) which monitors the remuneration of major UK blue chip organisations on a quarterly basis.

With staff wage bills often the largest employer expense, Mercer’s quarterly salary survey was initiated in Q1 2009 to track the remuneration plans of major blue chip organisations during the recession. In the third quarter (Q3) of 2009, 76 percent of MSI respondents stated that their firm was not considering a pay freeze in 2010. This is a marked change from the Q1 and Q2 MSI data which showed that an immediate reaction to the downturn was to reduce or freeze salary increases. Furthermore, no organisations surveyed in Q3 are planning a promotion freeze in 2010. However, respondents did highlight that, as a result of the recession, in 2010 there would be less emphasis on the cash element when rewarding staff and more on career development and elements of work/life balance.

Hannah Perera, a principal in Mercer’s human capital business and a specialist in executive remuneration, commented: “Cash, tarnished by the role of bonuses in the economic slump, is no longer king in the eyes of employers. It’s being usurped by an emphasis on employee engagement and a focus on motivating specific high value employees. Whether this ‘new normal’ approach continues when the economy gathers pace again remains to be seen.”

Salary and promotion freezes
According to the data, most organisations considered or instituted some form of salary freeze in 2009 with 22 percent introducing a blanket freeze and 32 percent applying a freeze to specific employee groups such as executives. Respondents had a more optimistic outlook for next year. Only 7 percent of organisations had already instituted a blanket salary freeze for this period, while 5 percent were considering it and 12 percent were considering a freeze for specific employee groups. Seventy-six percent were not considering a salary freeze at all in 2010.

Forecasts for salary increases amongst the respondents ranged from 2.8 percent to 2.57 percent depending on employee group. There was a more positive attitude to promotions amongst the sample group with none of the respondents considering a freeze on promotions in 2010. This compared with 12 percent in 2009.

However, it is noteworthy that nearly half the companies that froze pay in 2009 made special arrangements for key talent, with increases in base pay for these individuals being the most commonly cited approach (30 percent) followed by one-off payments (19 percent). In contrast, none of those companies that are making pay freezes in 2010 now anticipate making special arrangements for key talent. This may be due to severe business restraints or the result of special payments made in 2009.

“Even while profits had gone into hibernation during the economic winter,” commented Ms Perera, “companies have still needed to motivate their best hunters, or risk experiencing even leaner times. The lack of intention to repeat this in 2010 may reflect the belief that winter is nearly over.”

Review of reward elements
The survey also highlighted the emerging human capital trends for 2010. Sixty-one percent of respondents said that in 2010 their company would put more emphasis on high potential employees while 56 percent of companies will put more emphasis on employee engagement. Respondents also cited a desire to put more emphasis on critical skills (44 percent) and career development (44 percent). Overall there is increasing emphasis on the career and work/life balance elements of total reward and little change to cash compensation, with only 7 percent stating that there would be more emphasis in this area. Over 27 percent of respondents believe that their reward strategy will change permanently as a result of the recession.

Unsurprisingly, the survey also confirmed that the main driver of human capital decision-making for 2010 is continuing to contain or reduce costs (44 percent) and responding to non-cost critical business needs (33 percent). Only 22 percent felt that matching external competitive practices would drive their decision-making.

Notes for Editors
Data was collected from 41 blue chip organisations in September 2009.

Visit the Mercer's Salary Indicator page to access the full report.