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Most employers limiting raises to 3% this year

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A slim majority of employers—51%—say cost control is their primary compensation planning goal for 2016, after focusing more on talent retention in 2015. The result, according to Buck Consultants’ ninth annual Compensation Planning Survey: another year of stingy pay raises.

Buck found that average salary budgets are projected to increase a modest 3% in 2016, the same level where they have languished since 2013.

Only 45% of employers said retaining top talent remains one of their company’s top compensation priorities, compared to 53% last year.

Employers understand they risk losing top talent if they won’t dole out pay raises. Fifty-nine percent of employers said they are relying on new career development opportunities to help retain good employees.

While base pay is expected to remain flat this year, variable pay based on performance is becoming more important than ever.

“Performance bonuses are becoming the real raises in the workplace, allowing employers to reward top talent while controlling their fixed costs and maintaining flexibility for any challenging times in the future,” said Jim Sillery, Buck’s executive compensation leader. “Variable pay has become the new merit pay. It is more efficient since it is not fixed pay and, in most cases, does not drive increases in benefits.”

High performers will wind up earning an average of 4.4% more by year end, Buck found. Performance rating systems are tightening up to make sure money goes to the best employees. On average, 9% of employees this year will be assigned to the two lowest rungs on the performance level scale, up from 6.5% of employees in 2014.

“Employers continue to be fiscally cautious due to the recent U.S. recession and current global financial instability,” said Tami Simon, practice leader for Buck Consultants. Result: Top performers are getting much more than they did in the past and weak performers are getting much less.

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