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Salaries for ’09: Flat raises, more performance pay

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in Small Business Tax Deduction Strategies

Despite the economic gloom dominating the headlines, three new national salary surveys predict that U.S. employers will generally hold salary increases steady in 2009. The surveys predict that employers will award average pay increases at or near 3.8% next year, nearly identical to raises given during 2008 and 2007.

But smart employers aren’t handing out 3.8% across the board.

Increasingly during these tough economic times, organizations are expanding their pay-for-performance programs and dishing out greater increases to their top performers.

“The gap between top performers and low performers is spreading as companies struggle to sustain compensation levels throughout the organization,” says Steve Gross, leader of Mercer’s 2008/2009 U.S. Compensation Planning Survey. “Distinguishing pay increases based on performance allows employers to attract and retain employees that will contribute to the company’s competitiveness and success.”

According to Mercer’s survey of 1,000 employers, the highest-performing employees (14% of the workforce) will earn average base-pay increases of 5.6% in 2009.

In comparison, “average” performers (36% of the workforce) will earn 3.3% raises, and the “weakest” performers (7% of the workforce) will only scrape up raises of 0.6% in 2009.

In addition, employers will continue to lean more heavily on bonuses rather than base-pay increases. That allows companies to pad the paychecks of valuable workers without increasing fixed compensation costs.

In addition to the Mercer survey, the nonprofit WorldatWork association’s annual survey predicts that overall raises will hold steady in 2009. It predicts that salary increases for execs will run highest, again averaging 4.0%, while nonexempt workers will collect raises averaging 3.8% (see chart below).

The annual salary survey by the Watson Wyatt consulting firm predicts that merit increases will hover near 3.5% next year, identical to the percentage that it calculated for 2008, but slightly lower than the 3.6% average increase in 2007.

Industry variation.
Increases to base salaries also will differ among all industry sectors. U.S. employers within high-performing industries, as expected, plan to grant salary increases that are up to one-quarter higher than the 3.8% national average. For example, the oil and gas industry is expected to dish out average pay raises of 5% in 2009.

In contrast, other industries—including retail and durable goods—are expected to award lower-than-average pay increases in 2009 (see box below)

Regional variation.
The WorldatWork survey found slight regional differences in payroll budget growth. By state, North Dakota and Texas will lead the nation with projected growth of 4%.

Salary increases, by employee category

                                         2008    (projected)
Nonexempt hourly        3.8%    3.8%
Nonexempt salaried    3.8%    3.8%
Exempt salaried           3.9%    3.9%
Executives                      4.1%    4.0%

WorldatWork 35th annual salary survey

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