Now’s the Time to Resuscitate Merit Pay Practices & Budgets for the Second Half of 2009!

Becky Regan

Editor's note: Merit pay is the amount of dollars awarded to an employee based upon their prior year’s performance. This dollar amount is built into their base pay, representing a fixed cost. Most employees refer to this as their "annual raise." Most companies have the manager conduct an annual performance appraisal for the employee, then award a merit pay increase following the review.

With the first half of this year ending soon, and in consideration of a difficult economy and new administration in Washington, D.C., now’s the time to dust off and resuscitate your merit pay budget projections and compensation practices for the second half of this year. Your first reaction might be, "What merit pay budget?" You’ll be surprised to learn just how many United States organizations have recently reinstituted their 2009 merit pay budgets in anticipation of an improved economy for the second half of this year.

Let’s briefly revisit where we’ve been to appreciate where we are now. My ’09 merit pay budget projections that I made last October were based upon input from multiple expert compensation sources. The following bullets were copied from a presentation I gave then to the California Employers Association:

  • The average salary budget increase for all organizations in 2009 is 3.9 percent.
  • This projected increase is consistently reported by SHRM, World at Work and ERI.
  • Applies to all employee categories, regions and industries.

What a huge difference eight months has made! As we begin to emerge from this serious recession having conducted layoffs and other drastic cost reductions, it feels so much better to be on the back side of the downturn. But regardless of economic conditions, the last two bullets in my presentation will always be true:

  • Even in a declining economy, talent is always in demand.
  • Smart employers continue to give merit increases to retain talent and prudently manage while anticipating better economic times (and increased job opportunities).

Maybe your company froze your merit pay increases to prevent layoffs and control fixed costs. If so, now’s the time to dust it off, resuscitate it and bring it back to life! Consider following the lead of a little more than two-thirds (67 percent) of Unites States employers who are planning pay hikes for at least some of their employees before the end of this year. Mercer, a top human resources consulting firm, recently surveyed 850 employers to determine merit pay practices and budgets for the balance of 2009.

Overall, results showed that second half ’09 merit pay budgets will rebound to reflect a surprisingly slim decrease to 3.2 percent in contrast to last fall’s original projections of 3.9 percent. That’s good news, certainly. Manufacturing, engineering and information technology jobs are most likely to realize pay increases; marketing, sales and finance jobs are expected to remain stagnant or even decrease. And 73 percent of trades, production and service jobs will see pay increases.

"Companies realize that they need to be poised for a turnaround’" said Steve Gross, global leader of Mercer’s compensation consulting practice. "Continuing cost-cutting measure like salary freezes may put them at a disadvantage once the economy recovers."

The economy can’t help but improve in view of all of the Federal spending that’s occurred. Inflation concerns are still at least one year away, but expected to kick into gear in late 2010. Recognizing and rewarding your employees using a modest merit pay budget is a prudent, proactive practice to do now so that you don’t have to play "catch up" when business improves. In consistently providing targeted and modest merit pay increases, you’ll avoid granting double digit increases to retain staff within the next year or two.

Selective job groups are being targeted in most major companies for pay increases between now and the end of this year. Now is the time to reassess your merit pay practices to ensure that you don’t lose your top 20 percent of performers once the economy and job market rebounds. Remember, talent is always in demand. Don’t be caught behind the curve in recognizing and rewarding your employees to maintain your competitive market pay position!