In an uncertain economy, pay raises hover at a modest new normal

September 29, 2013

Salaries for Washington area workers rose 2.5 percent in 2013, a new survey shows, as companies remained cautious amid a lackluster economic recovery and grappled with uncertainty surrounding federal spending cuts.

Experts and employers say the fairly small bump in pay appears to be a new normal, since many firms are facing leaner budgets in the wake of the recession and are opting to reward high performers with bonuses or other flexible forms of compensation.

“People aren’t really looking to put additional money into salary right now beyond what they need to be competitive,” said Janet McNichol, human resources director at Rockville-based American Speech-Language-Hearing Association.

The increase, reported in an annual survey compiled by consulting firm Akron on behalf of the Human Resource Association of the National Capital Area, was slightly larger than last year’s uptick of 2.1 percent. And it exceeded the region’s inflation rate, which was 1.9 percent for the 12 months ending in July.

“People are feeling that there’s some need, obviously, to keep up with cost of living,” said Tom Wimer, chief executive of Axeo, a Reston-based human resources consulting firm. “But there’s not enough confidence yet to really be overly concerned about aggressive compensation structures for attracting and retaining people.”


A survey put out by the Human Resource Association of the National Capital Area shows that salaries in the Washington area rose 2.5 percent since 2012. Workers in customer service and product support jobs saw the largest salary increases, with manufacturing and banking industry jobs close behind.
Variable pay on offer

With salary increases hovering in the 2 to 3 percent range, even for top talent, employers are frequently awarding what’s known as “variable pay,” a catchall term for compensation such as bonuses, spot awards and profit-sharing plans.

“We think that variable pay has become the drug of choice, if you will, for organizations looking to try to send a more robust pay-for-performance message,” said Ken Abosch, compensation practice leader at human-resource consulting firm Aon Hewitt.

Experts say this format appeals to employers because of its flexibility: They can reward a job well-done without creating additional fixed costs. And some say it creates incentive for employees to do better work.

“Organizations have found that when they introduce variable pay, they see improved productivity, they see improved quality,” Abosch said.

In the Washington area, the number of companies awarding bonuses fell slightly to 67 percent from 70 percent, according to the study. However, 62 percent of managers and supervisors received variable pay, up from 57 percent the previous year. And the average award for these workers was 6.4 percent of base pay, up from 5.9 percent.

Defined salary ranges

When it comes to base pay, human resources professionals appear to be taking a similar approach to compensation across a variety of job categories and industries. They’re doling out modest raises in a measured, steady way.

In Arlington, the county government’s director of human resources, Marcy Foster, said that the county is undergoing a four-year study to make its salaries optimally competitive with those of nearby governments, such as Fairfax, Prince William and Alexandria.

“We don’t need to be paying them above and beyond what everybody else is, but we want to be in the same ballpark,” Foster said.

At the American Speech-Language-Hearing Association, McNichol said she and her team have developed a model for compensation that relies heavily on clearly defined salary ranges that have been tailored for each job category. These ranges are based on a variety of factors, including what studies show the market typically pays for a given skill set.

“If you are lower in your salary range and a very high performer, you’re going to get the larger increases. That could be 5 to 6 percent,” McNichol said. “If you’re in the top of your salary range, and you’re still a solid performer, you’re looking at probably 1 percent.”

McNichol said the model has sometimes led to difficult conversations with employees, who wonder, for example, why a top-performing editor at the organization makes less than the staffers on its accounting team. The difference, McNichol said, is because the salary ranges that have been set with an eye toward how much these workers would be paid in the broader labor market.

“Not everybody agrees with the whole free-market economy thing, but at least you can explain what you’re doing and why,” McNichol said.

Thomas Cardy, managing principal of Gaithersburg-based Compensation & Leadership Solutions, said that it’s common among his clients to use salary ranges to set pay for each job description.

“We’re finding the same rule is applicable across the board: People paid at the low end of the range are brought up to the middle,” Cardy said.

Contractors take a hit

The salary increases were smaller for the area’s legions of government contractors than for the workforce overall: Median salary raises for contractors were a meager 0.3 percent, the new survey shows.

Alan Chvotkin, executive vice president and counsel at the Professional Services Council, said the paltry increase reflects the general mood of the industry, which is scrambling to adapt to shrinking federal budgets. For example, the government is often now looking for a “lowest price technically acceptable” bid which means it’s seeking the cheapest proposal that meets the basic requirments, not the one with the best value.

“More and more awards were being made on that basis, and it is part of the competitive environment that is helping to drive pricing,” Chvotkin said. As a result, the need to offer low prices, he said, can easily weigh on employee pay.

At Fairfax-based Salient Federal Solutions, the company’s pay increases are “completely in line with” the 2.5 percent increase seen broadly across all local industries, according to Kay Curling, the contracting firm’s chief human resources officer. But Curling said she has noticed as she recruits new workers that the standard in the industry seems to have shifted.

“There are really high quality people who are unemployed,” Curling said. “It’s really a buyer’s market right now in terms of being able to find top talent for low prices.”

Siteworx, a Reston-based digital design firm that does some federal contracting, says it has recently seen an influx of job candidates from companies such as Booz Allen Hamilton and Science Applications International Corp.

Particularly when it comes to client service-oriented professionals, “Those salaries, which normally you would expect might really be very difficult to rein in and that you’d have to bid high for those kind of folks, I’ve seen those salaries be relatively flat,” said Mike Dunn, Siteworx’s chief financial officer.

Big boosts for some

While government contractor pay remained essentially unchanged, some job categories experienced relatively large jumps in pay. Customer service and product support workers had the largest increase in median salary, 7.4 percent.

“Some organizations are saying, ‘We can’t afford to lose any customers. We definitely want to make sure we’re keeping up and we’re putting resources in that area,’” said Angelo Kostopoulos, president of Akron.

The second largest salary change was for local warehouse and manufacturing workers, which saw a 4.9 percent pay increase. Pay for workers in banking positions rose 4.2 percent.

The survey also measured the pay levels for individual jobs. Among the positions that saw the largest salary growth were “program director (administrative),” which increased 20.5 percent to $165,300 per year, and “general clerk I,” which increased 20.3 percent to $32,950.

One of the positions that saw a major decrease in median salary was “business developer II,” which fell 16.3 percent to $59,620. Kostopoulos said that dip is likely not an indication that those workers are less in-demand or that they are bringing home less money. Instead, he said it likely means employers are shifting dollars from salary into variable pay for this type of worker.

The researchers collected compensation data from 302 companies for more than 333,000 employees in 500 different job descriptions. The data compares compensation in February 2012 to compensation in February 2013. Survey participants included employers across a variety of sectors, including Booz Allen Hamilton, MedStar Washington Hospital Center, Fairfax County government and George Washington University.

Most federal government workers are not included in the study. The median pay for federal employees remained nearly flat in 2013, according to the Office of Personnel Management.

Experts and employers expect next year’s salary increase budgets to look much like they did in 2013.

“Until the confidence in the economy improves, I think we’re going to see this continue,” Wimer said. “People are already working on their budgets for 2014, and I doubt that we’ll see much movement.”

Sarah Halzack is a reporter and Web editor for Capital Business. She covers the local job market and the business of talent and hiring. Previously, she was a Web producer for the Post's daily business and economic news section. She occasionally writes for other sections at the Post, most frequently in the form of dance reviews, dance features, book reviews and obituaries.
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