Survey: Employers This Year Plan to Give Largest Merit Raises Since 2008

Managers and HR professionals will have to deal with very modest pay increases in 2011. (Photo illustration by Dreamstime).

Here’s a warm thought in the middle of a long, cold winter: According to a new survey by global consulting giant Towers Watson, American employers are planning to give workers the largest merit increases this year since the start of the financial crisis.

The Towers Watson survey found that companies are optimistic and are budgeting merit increases of 3 percent for 2011. That compares with the 2.7 percent merit increase awarded to employees overall in 2010, and, is the largest merit increase since before the financial crisis began in the fall of 2008. Back then, merit increases typically averaged between 3.5 and 4 percent.

Yes, perhaps a bump in merit increases from 2.7 percent to 3 percent doesn’t seem like a lot, but it is just one more sign that the economy is slowly — and in some minds, finally — moving in the right direction.

Top performers always make out best

But there is some negative news here as well, and it’s this: Although the horizon seems brighter for most companies, the Towers Watson survey also found that 5 percent of organizations plan to freeze salaries for all workers this year, the same percentage as last year. However, 13 percent of companies plan to freeze salaries for executives while 12 percent plan to freeze salaries for hourly workers. Both figures are down sharply from 2010.

“Most companies have turned the corner and are now in a much stronger position financially to recognize and reward employees, especially their top performers” said Laura Sejen, global head of rewards consulting at Towers Watson, in a press release about the survey. “Throughout the recession and even afterwards, companies made it a high priority to provide better rewards to those employees who performed at the highest level and made the highest contributions to their organizations.”

According to the survey, companies directed the largest merit increases last year (4.0 percent) to workers who far exceeded their performance expectations, while those who exceeded expectations received a 3.4 percent average increase. Not surprisingly, workers who did not meet performance expectations did not receive any increase in 2010.

Hiring freeze beginning to thaw

To some, the best news in the Towers Watson survey may be this: that the hiring freezes that companies implemented during the recession are finally being lifted. Some 42 percent of companies say they are planning to hire workers for positions that require critical skills this year, while 40 percent plan to add professional and technical workers to their payrolls. One in four companies say they plan to hire sales professionals and hourly workers in 2011.

The survey also found that the attraction and retention challenges that employers are facing seem to be confined to select employee groups — primarily critical-skill and top-performing employees. More than half (54 percent) of companies reported problems attracting critical-skill workers, while another 37 percent say they are having difficulty hiring top-performing employees. About three in 10 organizations report problems retaining critical-skill employees, while one in four have difficulty retaining top performers.

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”As companies map out and implement their strategies to grow in a recovering economy, their ability to use not just pay but also the full complement of other reward and talent management programs to attract, engage and retain the best possible talent will be critical to their success,” said Sejen.

That’s certainly true, because as just about every manager, executive, and HR professional knows, money is not the primary motivating factor for most workers. Given what has happened to pay and benefits during the Great Recession however, it IS a pretty important component right now.

The Towers Watson survey was conducted in late January and early February, and is based on responses from 381 large and mid-size U.S. employers representing a broad range of industries.

My guess is that this survey is just the first of its kind. Yes, the economy is slowly improving, and this is a sign of that happening. For most workers, it can’t happen quickly enough.

John Hollon is managing editor of Fuel50, an AI Opportunity Marketplace solution that delivers internal talent mobility and workforce reskilling. He's also the former founding editor of TLNT and a frequent contributor to ERE and the Fistful of Talent blog.