Compensation, HR News & Trends

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

123RF Stock Photo

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.

John Hollon is Vice President for Editorial of TLNT.com, and the former Editor of Workforce Management magazine and workforce.com. An award-winning journalist, John has written extensively about HR, talent management, leadership, and smart business practices. Contact him at john@tlnt.com, and follow him on Twitter at http://twitter.com/johnhollon.
  • FrustratedHR

    I hate seeing articles like this everywhere. My company has not given raises in 5 years, we still have furloughs, and my promotion last year only got me a 1.5% pay increase. Some of us are dying to work for a company that gives 3% annual raises.

    • John Hollon

      Dear Frustrated: Yours is an interesting perspective, because it is yet another indication that no matter how much we keep wanting/hoping/wishing that the economy will get better, it is still struggling — and you and your company are proof of that.

      But I think my point holds: 3% raises DO seem to be the new norm, and although that seems like a huge increase when you are only getting 1.5% (as you are), it is still not enough ti adequately reward top performers, or, to help people who were cut or frozen during the recession catch up.

      • IT’SALLTHEECONOMY’SFAULT

        lol keep crying! This is an old article but I cannot stand this.

        I hear people complaining about this all the time, and never get around to looking at things internally first. Think about what value you bring to the company, and why you deserve to be paid top dollars. First of all, any company is a business, of course they’ll try to minimize costs (paying you), but if you don’t show them why you deserve more than that, they’ll give you the smallest amount for you to agree to stay.

        Read that again, they’ll give you the smallest amount for you to agree to stay, not for you to be happy or even satisfied, just enough for you to not be pissed off enough to leave. That’s it, that’s where companies will put the default line.

        Now let’s talk about value. If you are a top performer and you know it, your boss and the man upstairs who puts ink on paper for raises sure as hell knows it/should know it. Make a case for yourself (I’m not going to go into details here), and if they don’t make what you’d consider a fair effort to meet you half way, then it’s time to start looking around. Top performers don’t get pushed around.

        “Economy is bad” excuse: Bullshit. Stop complaining. I know plenty of my peers (25 years old) who just made $70k in BONUS this past year. You think the economy is in a rut? LOOK AT YOURSELF FIRST. WHAT VALUE DO YOU BRING TO THE COMPANY TO WARRANT A 15% RAISE?

        There are plenty of GOOD resources out there to help you get the raise you want, you know what all of them have in common? YOU HAVE TO PUT IN A SHITLOAD TO WORK, instead of bitch about it.

        Good luck,
        -Someone who just got a 73.3% raise

        • donna

          You clearly work in the financial industry

  • Frustratedin Tech

    How about working for a company like Apple, that is raking in profits hand over fist and all you get is 3%? we are already underpaid as employees. I do my job in three languages and do work with emerging markets yet I still make about 15% less for the same job at other companies and get only 3% WTF?

  • donna

    Have you noticed that the price of a Big Mac increases 5% every year with 2009 being the only exception? It is a fact.

  • anon

    The new normal seems to be no pay raise at all.

  • Cahone2

    Love those companies making Millions, but cant move a few Ks around.

  • hhh

    the new normal for a increase is to keep working from one yr to the next

  • CindyC

    My last raise was Jan 2007, bring on that 3% for EACH year since then! I can be hopeful, right?

  • saddened

    my company gave management a 3% raise and the lower end only got 2%

  • saddened

    what does that say. You who already make less don’t need as much as the top or we don’t feel you need to improve your life.

  • oblio9090

    New for you. A mere 2% is the new norm. Thanks for nothing, GOP.

  • IT worker

    Where I work, 2% is the norm for everyone – poor performance or excellent… we all get 2%. This started well over 10 years ago. Primary cause was the finical crisis we had back then. Now they just budget it in and figure you take it or leave it.
    What I can gather from many this is the typical percentage for many folks in the LA area. And 2% really doesn’t cover the winding gap of utilities, gas, food and insurance (Healthcare). They get 4-30% increases we see 2%.
    It’s frustrating.