Pay Hikes Won’t Top 4 Percent in 2005

The gap between pay raises and inflation is only about half as large today as it was during most of the 1990s.

According to Mercer Human Resource Consulting’s 2004/2005 U.S. Compensation Planning Survey, 2005 will be the fourth consecutive year that pay hikes average less than 4 percent.

The Mercer study, which analyzed responses from nearly 1,600 employers, found that among companies that plan to increase pay, executives will receive an average 3.7 percent increase this year. For all employees — management included — the average increase is expected to be 3.4 percent.

This pattern should continue into 2005, when executives are expected to receive another 3.7 percent raise, on average, compared with 3.5 percent for all employees.

From 1994 through 2001, annual pay increases ranged from 4.1 percent to 4.4 percent.

“Employers are seeing some signs of an improved economy this year, but they’re not ready to commit to higher pay increases yet,” noted Steven E. Gross, leader of Mercer’s U.S. compensation consulting practice.

Gross also pointed out that the gap between pay raises and inflation has decreased in recent years — from roughly 2 percentage points above annual inflation during most of the 1990s to about 1 percentage point today. He attributed this trend to an oversupply in the labor market and the awarding incentive pay as part of company compensation packages.

An encouraging development: The number of employers reporting salary freezes for one or more segments of their employee population fell to just 5 percent in 2004, from 12 percent in 2003 and 16 percent in 2002.

“With the economy rebounding and the job market growing, few companies can afford to eliminate salary increases for fear of losing talent,” Gross explained. Exceptions include companies in the business/information services, computer software/services, education, consulting/legal/accounting, and utilities sectors.

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