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September 9, 2009

HRN Compnews – Salary Budgets for 2010

Filed under: Compensation,Salaries & Pay3:30 pm

Salary Budgets for 2010

A quarterly publication from HRN Management Group

Salary budgets for 2010 are projected at 2.8% to 3.0% (all industries) according to the 2009-2010 World at Work Salary Budget Survey. Data from this survey was collected from 2,743 U.S. organizations.  Similar conclusions were reached from The Institute of Management and Administration (IOMA) Report and William M. Mercer’s 2009/2010 U.S. Compensation Planning Report with over 1100 organizations contributing data.

2009 has not been a typical year for salary increases or budgets. Due to the economic changes which have occurred salary budgets ranged 0.2 % to 1.4% lower than those originally predicted (depending on industry). Overall 2009 average salary budgets dropped to 3.2% from the 3.8% predicted last fall.

Even with these decreases in salary budgets, World at Work reports “approximately 80 percent of employees will receive a pay raise in 2009, down from 90 percent in 2008.”  Of the employees who received increases, nearly 50% still received a 3% or better increase.

We are reporting the salary budget increases this year showing the percent without zero budgets. This gives you a clearer picture of real budget increases industries have given. Zero salary increase budgets reflect those employers who have not given any form of increase this financial year. Typical zero increases would be around 2%.  This year the average zero increase for all employment groups is 34% with a range from 28% for non exempt to 43% for executives. In 2010 an average of 12% of organizations are projecting they will be freezing budgets.

Actual results from the World at Work survey conclude the following:

Nonexempt Exempt Executive
2010 Projected Average Salary Budget Increases without zeros
All Industries (National) 3.2% 3.2% 3.3%
Banking 2.9% 2.9% 2.9%
Insurance 3.1% 3.1% 3.2%
HealthCare 3.1% 3.2% 3.3%
Educational Services 3.0% 3.1% 3.1%
Non-Profits 3.2% 3.2% 3.2%
Public Administration 3.5% 3.5% 3.4%
Software Services 3.0% 3.0% 2.9%
Chemical Manufacturing 3.4% 3.5% 3.5%
2009 Actual Average Salary Budget Increases without zeros
All Industries (National) 3.2% 3.2% 3.5%
Banking 3.0% 2.9% 3.0%
Insurance 3.0% 3.1% 3.3%
HealthCare 2.9% 3.0% 3.4%
Educational Services 3.2% 3.2% 3.5%
Non-Profits 3.4% 3.4% 3.4%
Public Administration 3.7% 3.7% 3.8%
Software Services 2.7% 3.0% 3.0
Chemical Manufacturing 3.4% 3.5% 3.7%

[The percentages identified above include budgets for COLA, lump-sums, merit and promotional increases/ 34%  of organizations have recorded no increases in 2009 ]

Strategic Compensation Changes in 2009

2009 saw many organizations adjusting their salary budgets due to the economic changes. IOMA reported from a survey of 500 HR professionals that 68% changed their original plans or took different measures to adjust to the situation.

Reduced Planned Increases in Response to Economic Changes

Yes No Other
Overall 68.4% 27.6% 4.0%
Banking/Insurance 58.2% 36.4% 5.5%
HealthCare 40.4% 55.3% 4.3%
Education 55.6% 44.4% 0%
Information Technology 75.0% 12.5% 12.5%

(Source IOMA’s Report on Salary Surveys)

Reduced increases were not the only decision taken by organizations. Hiring freezes were 41.1%: Employers with less than 199 and between 2,000–6,999 employees were the most likely to select hiring freezes as their main cost saving strategy in 2009.

Measures taken to adjust to the economic situation in 2009 included:

Overall FI HC Mfg Edu IT GN
Hiring freeze 41.1% 37.8% 36.1% 64.8% 44.4% 42.9% 48.3%
Reduce hours 26.2% 8.9% 25.0% 48.9% 11.1% 0.0% 16.7%
Pay freeze 44.0% 24.4% 16.7% 55.7% 22.2% 100% 41.7%
Scaled back increases 32.6% 51.1% 36.1% 17.0% 22.2% 28.6% 21.7%
Reduce Salaries 13.5% 4.4% 0.0% 27.3% 0.0% 14.3% 3.3%
Reduced Benefits 15.8% 4.4% 16.7% 19.3% 11.1% 14.3% 16.7%
Organizational Restructuring 43.8% 51.1% 61.1% 50.0% 55.6% 42.9% 41.7%

(Source IOMA’s Report on Salary Surveys)

Code for industry: FI =Finance and Insurance      HC = Healthcare      Mfg =Manufacturing      Edu =Education
IT =Information Technology    GN = Gov’t Non-Profit

Highest overall adjustments split into different employee classifications:

44% Pay Freeze
Non Exempt      32%
Exempt             49%
Executive          51%

41.1% Hiring Freeze
Non Exempt      40%
Exempt             51%
Executive          33%

There is more optimism in the 2010 budget increases. Three fourths of organizations are projecting  2010 average budget increases of 2.8%. The actual increase will depend on industry and geographic location(s).

Measures to adjust to economic situations in 2010 include:

Overall FI HC Mfg Edu IT GN
Hiring freeze 36.2% 35.3% 30.0% 37.0% 25.0% 16.7% 30.9%
Reduce hours 20.7% 0.0% 23.3% 38.4% 0.0% 0.0% 20.0%
Pay freeze 31.0% 26.5% 20.0% 28.8% 0.0% 50.0% 29.1%
Scaled back increases 29.7% 26.5% 40.0% 21.9% 22.2% 33.3% 32.7%
Reduce Salaries 5.9% 0.0% 12.2% 12.3% 0.0% 0.0% 0.0%
Reduced Benefits 12.7% 5.9% 13.3% 12.3% 37.5% 0.0% 20.0%
Organizational Restructuring 35.3% 35.3% 30.0% 30.1% 50.0% 16.7% 43.6%

(Source IOMA’s Report on Salary Surveys)

Code for industry: FI =Finance and Insurance      HC = Healthcare      Mfg =Manufacturing      Edu =Education
IT =Information Technology    GN = Gov’t Non-Profit

Structure Changes

Salary Structure increases will range from 1-2% for 2010. Also, as always, the range movement may vary slightly at individual pay grades.

Inflation Rate

The Consumer Price Index (CPI-U/All urban consumers) national average was -2.1% for the 12-month period ending July 31, 2009, decreasing from 5.6% for the same time period a year earlier.

The urban inflation rate for the various regional areas of the U.S. for the same time periods was:

Region/City size July 2007 July 2008 July 2009
Midwest 2.3% 5.6% -2.5%
Northeast 2.0% 5.7% -1.9%
South 2.3% 5.8% -2.1%
West 2.8% 5.3% -2.0%
>1.5 million 2.3% 5.4% -2.0%
50,000 to 1.5 million 2.4% 5.8% -2.3%
<50,000 2.5% 5.8% -2.2%

The inflation rate while negative is fueled by the decreases in housing (-1.0%), transportation (-14%) and energy costs (-28%). The biggest increases were seen in Education (+2.8%), Medical (+3.2%), Clothing (+1%) and Food (+.1%). If the drop in energy cost is removed from the CPI-U data, the overall index increased by 1.4% in the last 12 months.

The Bureau of Labor Statistics of the U.S. Department of Labor www.bls.gov

Unemployment Rates

Another economic factor to consider when developing salary increase budgets for 2010 is the unemployment rate.  The unemployment rate not seasonally adjusted increased to 9.4% in July 2009 from 5.7% in July 2008.

Regional Unemployment Rates:

Region July 2007 July 2008 July 2009
New England 4.8% 5.4% 8.6%
Middle Atlantic 4.8% 5.5% 8.8%
South Atlantic 4.5% 6.0% 9.5%
East South Central 5.0% 6.8% 10.4%
West South Central 4.8% 4.8% 7.7%
East North Central 5.8% 7.2% 11.4%
West North Central 4.3% 5.1% 7.5%
Mountain 3.7% 5.0% 8.1%
Pacific 5.3% 7.0% 11.3%

The Bureau of Labor Statistics of the U.S. Department of Labor www.bls.gov

Compensation Philosophy Relative to Market

Employment Group Below At Market Above No Policy
Non Exempt 3% 83% 6% 8%
Exempt 3% 83% 8% 6%
Executive 3% 76% 14% 7%

Variable Pay

Variable pay continues to be used by most organizations. It did not drop as much as other areas because of the flexibility the plans allow for adjustments during the year to the “at risk” money. In general there was a 5-10% decrease in budgeted amounts. The actual amount paid was relatively the same as 2008.  The typical variable pay for non-exempt employees is 3-5% (of base salary); exempt employees is 7-12%; and executive employees is 15-50% depending on the industry.

Budgeting for Salaries in 2010

Establishing a 2010 salary budget should, of course, be based on financial resources available and current market position. There are some generally accepted best practices to guide the process:

First, review the organization’s Compease Compa-ratio Reports and develop a Merit Increase Plan that is consistent with the organization’s compensation strategy. A review and analysis of these three Compease reports typically offers the best opportunity to identify any base pay outliers:

  • Compa-ratio Report by Compa-ratio. This reports compa-ratios from highest to lowest which makes it easy to select jobs at either end for review.
  • Compa-ratio Report by Job Grade. Each grade will typically have compa-ratios from 80% to 120%. Review job grades that are higher or lower than the range to see if they are evaluated correctly.
  • Compa-ratio Report by Time in Position. This report helps identify employees with compa-ratios that do not seem to match their time in the position.

After identifying compa-ratio exceptions, these parameters may be useful in determining any needed adjustments:

  • As a general rule, most or all employees should be paid between the minimum and maximum rates established by the salary range.
  • In a pay-for-performance system, employees are ultimately paid at a rate that is comparable to their long-term performance. A useful rule-of-thumb is that compa-ratios:

o    Between 80% – 90% are considered entry rates. New employees are generally hired at these rates.

o    Between 90% – 97% would be considered appropriate for employees who are not yet fully trained and qualified for the position.

o    Between 97% – 103% would be considered appropriate for employees who are fully qualified for the position and who, over time, consistently perform at an acceptable level.

o    Above 103% would be appropriate for employees who are fully qualified, and over time, consistently perform above acceptable levels.

These general guidelines may help determine how employees are positioned from a pay perspective assuming acceptable performance levels:

Entry level non-exempt positions (grades 1-5) should reach the mid-point (100% compa-ratio) within 2 years.

Middle level non-exempt positions (grades 6-8) should reach the mid-point within 3 years.

High level non-exempt or entry level exempt positions (grades 8-10) should reach the mid-point within 4 years.

Middle level exempt positions (grades 11-12) should reach the mid-point within 5 years.

High level exempt positions (grades 13-14) should reach the mid-point within 6 years.

Executive level positions should reach the mid-point within 7-10 years.

Expect to find some employees who are currently being paid outside the range limits for their job grade. Some will be below the range minimum and some will be above the range maximum. Such inconsistencies typically are not resolved by reducing an employee’s current base salary or by making adjustments to increase base salary.  As an alternative, the following method is suggested:

·     Under range minimum – The Compease Merit Matrix recognizes any out-of-range situations and will make adjustments to the recommended merit increase to address the problem. Below range conditions may require more than one merit increase cycle to resolve. Once inside the range limits, the regular merit increase schedule will take effect.

·     Over range maximum – Employees paid at or above the maximum of their salary range should still receive a merit increase based on the normal merit increase schedule.  However, instead of being added to base salary, the merit increase is often given as a lump sum payment.

Other information that can enhance the outcome of your salary budgeting process:

·     Job grades and evaluations should ideally be reviewed at least every three to five years or more often if material changes are made to many jobs.

If the overall company compa-ratio is below the expected 97% (an overall company compa-ratio of 96% to 97% is typical for most companies), consider establishing a plan that will move the company closer to market within a prescribed period of time.

Utilize the Merit Increase Planning Module to quickly build potential merit increase budget scenarios to address any issues identified in the review exercise discussed above.

Remember:

Almost 70% of organizations are focusing on high performance merit distinctions. To facilitate this, consider adjusting the company’s matrix model to increase the merit component for high performing employees. By reducing the average merit increase slightly, merit increases for high performers can be given while maintaining the overall merit budget to an acceptable level.  

Current Unemployment Rates for States and Historical Highs/Lows
Seasonally Adjusted
State July 09 —-Historic High—- —-Historic Low—-
United States 9.4 Nov-82 10.8 Apr -00 3.8
Alabama 10.2 Dec-82 14.4 Feb-07 3.3
Alaska 8.3 Jul-86 11.5 Sep-99 5.9
Arizona 9.2 Feb-83 11.5 Jun-07 3.6
Arkansas 7.4 Mar-83 10.2 Sep-00 4.1
California 11.9 Feb-83 11.0 Feb-01 4.7
Colorado 7.8 Nov-82 9.1 Jan-01 2.5
Connecticut 7.8 Jan-76 10.0 Nov-00 2.1
Delaware 8.2 Jan-77 8.2 Oct-88 2.9
District of Columbia 10.6 Mar-83 11.4 Dec-88 4.8
Florida 10.7 Mar-76 9.7 May-06 3.3
Georgia 10.3 Jan-83 8.3 Dec-00 3.4
Hawaii 7.0 Mar-76 10.2 Dec-06 2.2
Idaho 8.8 Feb-83 9.4 Dec-07 2.7
Illinois 10.4 Feb-83 12.9 Mar-99 4.1
Indiana 10.6 Nov-82 12.8 Apr-99 2.6
Iowa 6.5 May-83 8.5 Jan-00 2.6
Kansas 7.4 Sep-82 7.4 Oct-78 2.9
Kentucky 11.0 Dec-82 12.1 Mar-00 4.0
Louisiana 7.4 Sep-86 12.9 Jul-06 3.2
Maine 8.4 Mar-77 9.0 Jan-01 3.0
Maryland 7.3 Aug-82 8.3 Mar-00 3.3
Massachusetts 8.8 Jan-76 10.9 Dec-00 2.7
Michigan 15.0 Nov-82 16.9 Mar-00 3.2
Minnesota 8.1 Nov-82 9.0 Apr-99 2.5
Mississippi 9.7 May-83 13.7 Jan-01 4.9
Missouri 9.3 Apr-83 10.5 Jan-00 2.6
Montana 6.7 May-83 8.7 Aug-07 3.1
Nebraska 4.9 Feb-83 6.8 Feb-98 2.2
Nevada 12.5 Dec-82 10.7 Apr-06 4.1
New Hampshire 6.8 Jun-92 7.7 Apr-87 1.9
New Jersey 9.3 Feb-77 10.6 Jun-00 3.5
New Mexico 7.0 Apr-83 9.9 Jan-08 3.1
New York 8.6 Jul-76 10.5 Apr-88 4.0
North Carolina 11.0 Feb-83 10.2 Apr-99 3.1
North Dakota 4.2 Mar-83 6.9 Jan-98 2.5
Ohio 11.2 Jan-83 13.8 Mar-01 3.9
Oklahoma 6.5 Aug-86 9.4 Jan-01 2.7
Oregon 11.9 Nov-82 12.1 Apr-95 4.7
Pennsylvania 8.5 Mar-83 12.9 Mar-00 4.0
Rhode Island 12.7 Nov-82 9.7 Jul-88 2.9
South Carolina 11.8 Jan-83 11.4 Mar-98 3.1
South Dakota 4.9 Oct-82 5.9 Mar-00 2.4
Tennessee 10.7 Dec-82 12.4 Mar-00 3.8
Texas 7.9 Oct-86 9.3 Apr-08 4.1
Utah 6.0 Mar-83 9.7 Mar-07 2.4
Vermont 6.8 Jun-76 9.0 Mar-00 2.2
Virginia 6.9 Jan-83 7.8 Jan-01 2.2
Washington 9.1 Nov-82 12.2 Apr-07 4.4
West Virginia 9.0 Mar-83 18.2 Aug-08 4.1
Wisconsin 9.0 Jan-83 11.8 Apr-99 2.9
Wyoming 6.5 May-83 10.1 Feb-79 1.9

The Bureau of Labor Statistics of the U.S. Department of Labor www.bls.gov

Interested in HR Software? Checkout HRN’s Performance Pro, Compease, & Incentease today!

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