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Aug 10, 2015

If you were thinking all the recent news of job growth signaled a big comeback for the U.S. economy, think again — because another economic indicator tells a different story.

According to the latest survey by Towers Watson, the global talent management consultant, “Pay raises for U.S. employees are expected to hold steady in 2016,” and that even though “virtually all respondents (98 percent) are planning to give employees raises next year,” they are “projecting average salary increases of 3.0 percent in 2016 for their exempt nonmanagement (e.g., professional) employees.”

Yes, you read that right — next year’s salary hike is projected to be the same 3 percent increase employees received this year and in 2014.

This has been the big bugaboo about America’s economic recovery. Even though job growth has been encouraging, wage growth has remained flat.

A 3% pay raise is “the new norm”

As Towers Watson North America practice leader Sandra McLellan put it:

To a large extent, 3 percent pay raises have become the new norm in corporate America. We really haven’t seen variation from this level for many years. While most organizations are finding the talent they need at current salary levels, we are seeing more employers prioritizing how their salary budgets are being spent, especially in light of their ongoing difficulty in attracting and retaining top performers or employees with critical skills.”

The Towers Watson survey also found that “executives and management employees can expect increases that will average 3.1 percent in 2016,” and that “the number of companies that are giving raises has risen steadily since the recession in 2008.”

High performers continue to fare a little bit better, with an average salary increase of 4.6 percent this year, and Towers Watson notes that it is “about 77 percent larger than the 2.6 percent increase given to workers receiving an average rating.”

That’s all well and good, but still, a 4.6 percent increase for top performers is nothing to write home about.

More annual, short-term pay incentives

For the past five years, I’ve said this every summer when the salary survey for the new year comes out, and I think it holds as true today as it did back in 2010 and 2011:

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 or 6 percent increase, and that’s hardly enough to reward them for their great work.”

There’s another trend that seems to be taking hold, according to the survey: “More employees are becoming eligible to receive annual and short-term incentives, and more are also receiving awards. More than eight in 10 exempt employees (85 percent) received a bonus this year, up from 81 percent in 2014. Meanwhile, 87 percent of exempt employees were eligible to receive an annual or short-term bonus this year, up slightly from 86 percent last year.”

No longer about base salaries?

As Towers Watson’s Sandra McLellan noted:

It’s no longer all about base salary. While our research consistently shows the importance of pay when employees decide to stay or leave an organization, we also know their decisions are not just about the money. Opportunities for career development, learning development and challenging work are top drivers of retention. It’s the value of the total package — compensation, benefits and non-monetary rewards — that makes the difference. As a result, companies are paying closer attention to understanding how employees value these elements.”

I agree with  the notion that it isn’t all about pay when employees decide to stay or go, but pay plays a big part — particularly if it isn’t going up very much. And, 3 percent raises, on average, is the kind of mediocre increase that we keep reading about in the monthly job report.

The bottom line? It’s hard to read anything else except that employees are going need to change jobs to get themselves a decent raise, because the numbers show that most workers will not get much of an increase next year, just as they haven’t gotten much of an increase every year since 2008.

Yes, top performers are getting 4.6 percent, on average, but that’s hardly a generous jump for your very best workers. I wonder how many employers have that in mind?