Remember Those 3% Salary Increases? Now, They’re the “New Normal”

Remember back when 5 percent was considered an average annual pay increase?

Maybe you don’t, but I do, and although we haven’t seen anything near 5 percent pay increases for quite a few years, there was always hope that we would eventually see the economy improve to the point where raises would start to rise again, too.

Well, like so much of what was said by both parties in our recent election, that’s just wishful thinking.

We’ve been seeing a number of surveys about 2013 raises and salaries since last summer, and just about all of them say the same thing: you can expect raises of 3 percent, on average, next year the same as you saw this year.

“Increases will settle at this 3% level”

There’s no big surprise in that, but the wrinkle today comes from the 2013 salary forecast from Buck Consultants, because it not only reconfirms the 3 percent raise projections that everyone else has been pushing, but adds this to the forecast:

The median salary increase in 2013 will be 3 percent, as employers continue to be cautious with their salary budgets. Buck Consultants predicts that the new normal for salary increases will settle at this 3 percent level (emphasis added).”

“The results of this survey are similar to past years in terms of compensation — slow growth, lots of challenges and not a lot of money to spend,” said David Van De Voort, principal at Buck Consultants, in a press release about the survey. “However, we’ve moved past the environment of several years ago when employers were freezing pay and reducing 401(k) matches.”

Yes, it’s great that we’re past the worst of the recession when pay freezes, layoffs, and furloughs were everywhere, but we are supposed to be well past that now, and raises were supposed to have rebounded.

The fact that Buck Consultants sees the 3 percent level annual raise level as the “new normal” speaks volumes about the state of the economy and the perception by employers that minimizing annual salary rewards to workers, and locking those minimal rewards going forward,  is a smart business strategy.

Workers don’t ever catch up at 3%

Many will say — and rightly so — that a 3 percent raise is better than no raise, or worse yet, a pay freeze or pay cut, as so many of us (yours truly included) saw just a few short years ago.

While that may be true, it also points to another truth: if 3 percent is the average salary increase and “the new normal,” workers aren’t catching up at all for the cuts they endured during the worst of the recession. Plus, a 3 percent average hike means that top performers are probably only getting a 5 pr 6 percent increase, and that’s hardly enough to reward them for their great work.

“The war for talent — particularly for senior leaders and employees with specialized skills — rages on,” Adam Sorensen, a global practice leader for WorldatWork, noted last summer. “Organizations must continue to be competitive in cash compensation even as they expand the range of other rewards in order to attract, motivate and retain their critical talent.”

He’s right, of course, but there are other ways besides annual salary increases to reward top talent, and as the survey from Buck Consultants makes clear:

The expected size of short-term incentive awards forecast for 2013 is greater than the target payouts for 2012 and actual payouts in 2011 for all employee groups except CEOs. Employers see a bonus or other short-term incentive – a one-time expense as opposed to the annual expense of a salary increase – as a cost-effective approach for rewarding employees.”

Does 3% send the wrong message?

Yes, short term incentives are a great way to reward your “A” players, but I’ve always found that no matter what happens with the short-term rewards, it’s the annual increase that really sends the clearest message to employees about their ongoing worth to the operation. If you give mediocre (say 3 percent) raises, you may end up sending a message to your employees that perhaps you didn’t really mean to send.

And, the Buck Consultants survey’s Executive Summary makes this point as well, although in a slightly different way:

The pattern of results reported in this survey suggests that employers will continue upon a cautious and conservative course with regard to base pay, but are willing to use variable incentive compensation to reward contributions that result in tangible business success. As soon as the U.S. economy turns the corner, attracting talent that is the engine of growth, and re-engaging a workforce that has been disheartened by years of limited career opportunity and stagnant compensation will become universal priorities and a ‘you bet your business’ proposition.”

Yes, employers know they need to better reward and re-engage the workforce with better compensation and career opportunities, and they will, just as soon as the economy “turns the corner.” Unfortunately, that’s what we have been hearing for three years, and that “corner” we need to run hardly seems any closer now than it did then.

Forecasts have been on the money

This sixth annual Compensation Planning Survey released by Buck Consultants (A Xerox Company),  analyzed responses from more than 350 organizations to determine trends in compensation for the coming year. Buck completed its survey in September, and it includes responses from 362 employers, representing virtually every sector of the U.S. economy.

Salary forecasts are just that — a forecast. But, the forecasts have been remarkably on the money (no pun intended) the last few years. And, the post election vibe doesn’t seem to indicate that they will get any better when the actual raises start to kick in next year.

The new normal? Yes, we’ve seen it coming, and unfortunately, it’s still just 3 percent.