Human resources consultancy Aon Hewitt released its annual salary increase survey of more than 1,000 companies and found that spending on "variable pay" -- merit pay and annual bonuses -- is projected to decline to 12.5 percent of companies' payroll budget in 2018, the lowest level since 2013. Raises to base salaries are also expected to be meager, with companies budgeting 3 percent for base pay increases, roughly the same as the past six years.
While the flat pay increase is likely to be discouraging for many workers, said Ken Abosch, who heads the North American compensation practice for Aon Hewitt, "the real story is what’s happening in variable pay." The first surprise, he said, was seeing a slight pullback in spending on bonuses for 2016 -- companies spent 12.7 percent of their budgets on bonuses, compared to 12.8 the year before. That was the first time since 2010 that number has declined.
But perhaps even more "alarming," said Abosch, is next year's projection. "That's a correction. That's a change in pattern," he said, pointing to CEOs' concerns about political uncertainty, global competition and concerns about rising inflation.
Abosch said the companies' projections for 2018 run counter to what the White House has suggested could happen to wages as a result of low unemployment. "The rhetoric from the administration suggests that there’s going to be more aggressive wage growth, and this report is not supporting that," he said.
The roughly flat base salary increases may seem surprising, Abosch said, given the tightening labor market and what companies have been saying about having a hard time filling openings, but the days of the 4 or 5 percent pay raise have long been numbered.
As companies have shifted more resources into paying out bonuses and merit increases rather than standard pay bumps, aiming to differentiate even more between top performers and middling workers, 3 percent has become "the new 4 percent," Abosch said.
In addition to believing that differentiated pay helps incentivize employees to work harder, employers have been favoring bonuses or additional perks because they act as a "relief valve," something that's far easier to cut than base pay, which becomes a fixed cost.
The outlook is even more bleak for workers who aren't high performers. Aon's survey found that 40 percent of companies are planning to reduce or eliminate increases for lesser performers in 2018 and 15 percent are setting more aggressive performance targets.