Promotional increases on the rise as employers focus on retaining and engaging critical talent through career progression
Although the economy is improving and the job market is more robust, salary increase budgets for US companies continue to show little signs of growth. According to Mercer’s 2015/2016 US Compensation Planning Survey, the average salary increase budget is expected to be 2.9% in 2016, up slightly from the average increase budget of 2.8% in 2015. However, salary increases for top-performing employees – 7% of the workforce – will be almost twice that of average performers as companies continue to differentiate salary increases based on performance. See Figures 1 and 2.
“During the recession, employers’ focus shifted from fixed pay to variable pay to control costs. As they have become more comfortable holding the line on fixed cost increases with respect to salary budgets, we’re seeing a steady rise in the use of short-term incentives as a mechanism for rewarding performance to supplement rather low pay raises,” said Mary Ann Sardone, Partner in Mercer’s Talent practice and Regional Leader of the firm’s Rewards practice. “In addition, flat budgets have created more reliance on other reward methods like developing career opportunities and creating meaningful work experiences that align with the company’s goals and support employees’ needs."
Yet, pay advancement is evident in other adjustments. Mercer’s survey shows that promotional increases as a percent of base pay are rising, a sign that organizations are looking internally at talent and career progression to retain key employees rather than risk losing them to competitors. These increases, which average approximately 8% of pay, vary by job category and consistently rose for all groups For executives, promotional increases rose to 9.1% of base salary (compared to 8.4% last year) and for professionals rose to 7.7% (compared to 6.9% last year). See Figure 3.
In addition, 41% of organizations are now budgeting promotional increases separately from merit increases, up from just 36% in 2014. “Employers are finding ways to deliver pay increases through other means like promotions, which reflects the growing trend of focusing on careers and sustained performance, not a one-year snapshot and reward,” said Ms. Sardone.
As organizations look for enhanced ways to pay for performance, differentiating salary increases by employee performance continues to be the norm. Companies are rewarding top-performing employees with significantly larger increases than those in the lower-performing categories. Mercer’s survey shows that the highest-performing employees received average base pay increases of 4.8% in 2015 compared to 2.7% for average performers and 0.2% for the lowest performers which is expected to continue in 2016. See Figure 2. “In today’s business environment, performance continues to drive pay raises. Companies expect performance and will vary rewards based on individual achievements, organizational success, or both,” said Ms. Sardone.
Besides differentiation among employee performance groups, variations in salary increases exist among industries. While most industries were cautious in 2015 granting pay raises on par with or slightly above the national average increase of 2.8%, organizations in low-performing sectors – specifically Energy and Mining, which were impacted largely by the declining oil prices in late 2014 – had salary increase budgets drop to 2.6% and 2.7%, respectively. Furthermore, the current market conditions of this sector prompted some pay freezes. According to Mercer’s survey, the Energy sector reported the highest percentage of salary freezes with 17% of organizations freezing pay for at least one employee group.
To ensure employee engagement and better manage talent programs, regardless of industry, companies are creating the infrastructure for career management through the adoption of career frameworks. According to Mercer’s survey, 40% of organizations currently have a career framework and 30% of those that do not are planning to implement one. “A framework for jobs and platform for communicating careers are essential to match employee capabilities with opportunities and talent needs of the organization,” said Ms. Sardone.
Mercer’s 2015/2016 US Compensation Planning Survey, which has been conducted annually for more than 25 years, includes responses from 1,504 mid-size and large employers across the US and reflects pay practices for more than 17 million employees. The survey results are captured for five segments of employees: executive, management, professional (sales and non-sales), office/clerical/technician, and trades/production/service across multiple industries.
To purchase the survey results, visit www.imercer.com/cps or call 800 333 3070.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.