Pay Raises in 2014: Better, But Still Below Mid-2000 Levels

As the economy slowly gains strength, so do pay increases doled out by U.S. employers.

Employers, on average, anticipate increasing employee salaries by 2.9% in 2014, a marginal boost from 2.8% this year and 2.7% in 2012 and 2011, according to an annual survey by consulting firm Mercer.

Two other new salary surveys by WorldatWork and The Conference Board project average 2014 salaries to increase by 3.1% and 3.0%, respectively.

This is an improvement from 2009, when average pay raises bottomed out at 2.1%. But it still lags behind the mid-2000s when raises averaged about 3.5%. The message: The economic recovery has yet to pick up enough steam to substantially boost overall salary budgets.

“Salary budgets generally reflect what is going on in the national economy,” says Kerry Chou, senior compensation practice leader for WorldatWork. “A nervous economic recovery creates nervous employers who are hesitant about making significant changes to their salary budgets and other fixed costs but are making an effort to find other ways to reward employees.”

The impact: The improving economy is forcing employers to give greater pay raises and bonus dollars to top-performing talent.

As organizations look for enhanced ways to pay for performance, they are segmenting their workforce first by high-performing, as well as high-potential, employees. As a result, companies are rewarding these 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 4.6% this year compared to 2.6% raises for average performers and 0.2% for the lowest performers.

“Employers recognize that their greatest challenge is to retain their top performers to avoid post-recessionary flight of these valuable assets. This means they have to reward and recognize them,” said Jeanie Adkins, a leader of Mercer’s Rewards practice. “This includes providing higher pay increases along with other non-cash rewards, such as training opportunities and career development.”