Compensation

BLR’s 2017–2018 Pay Budget and Variable Pay Survey

How much of an increase in pay are your employees receiving in 2017? What level of pay raise is your organization projecting for 2018?

2017 Merit Increases

This year’s BLR®—Business & Legal Resources Pay Budget and Variable Pay Survey is practically a replay of last year’s survey, with 18.6% (up from 17.9% last year and 16% the year before) of employers awarding merit increases of up to 2.5% (averaged across all employee types). And, 45.1% (up from 41.8% last year and 42.5% the previous year) are awarding increases between 2.51% and 5%. Another 2.1% (down from 4.1% last year and 4.4% the year before) are awarding increases from 5.01% to 10% of base pay. At 1.6% both this and last year, the percentage of survey participants awarding more than 10% merit increases holds steady.

A closer look at the data shows that 15% of employers awarded merit increases of up to 2.5% to senior management, 19.1% awarded as much to employees at the management level, 19.7% awarded it to non-management salaried exempt employees, 20.6% awarded the same to hourly office employees, and 18.8% awarded up to 2.5% of base pay as an increase to hourly non-office employees. At an average of 23.6% across all employee types, 2.5-3% is the most commonly awarded amount among employers awarding merit increases in 2017.

Continuing the downward trend, on average, across all employee types, 29.2% (down from 30.2% last year, 31.2% in 2015, 35.7% in 2014, and 38.1% in 2013) of responding employers did not award merit increases in 2016. The breakdown on that number shows that an average of 11.1% awarded $0, and 18.1% selected N/A.

A peek at the maximum increase tied to a performance scale of 1–5 shows that 20.1% of survey participants awarded a pay increase of 2.51% to 3% for a score of 2.01–3 (meets requirements), and 11.8% awarded that amount for a score of 3.01–4 (exceeds requirements) or a score of 4.01–5 (far exceeds requirements).

At the other end of the scale, 86.9% (down from 90.8% last year) of survey participants did not reward employees who failed to meet the requirements of their jobs, and 57.2% (down from 63.3% last year) didn’t reward employees needing improvement. Of those who did, however, 8.6% awarded pay increases of up to 2% percent of base pay for employees who failed to meet requirements, and interestingly, 29.4% awarded pay increases of up to 2% to employees whose performance “needs improvement.”

2017 General Increases (Not Tied to Performance)

General increases in 2017 are comparable to merit increases with 21% of employers (on average) awarding up to 2.5% and 24.6% awarding increases of 2.51% to 5%. Another 1.3% are awarding increases of 5.01% to 10% of base pay and 1.1% handing out raises above 10%. As for the most commonly awarded amount, a general increase of .01% to 2% almost ties for first place with 2.5% to 3% pay increases, leaving 2% to 2.5% increases coming in a distant third.

The breakdown of employee types shows 18.1% of employers awarded general increases of up to 2.5% to senior management, 20% awarded that amount to management, 21% awarded it to nonmanagement exempt employees, 24.1% awarded the same to hourly office employees, and 21.6% awarded up to 2.5% of base pay as an increase to hourly nonoffice employees.

On average, across all employee types, 49.2% of responding employers did not offer general increases in 2017. The breakdown on that number shows that 15.7% awarded $0, and 33.5% selected N/A.

2017 Maximum Individual Increases

On average, across all employee types, 15.3% awarded 2.51% to 3% as their maximum individual increase, 5.8% awarded 3.01% to 3.5%, 7.4% awarded increases of 3.51% to 4%, 2.2% awarded 4.01% to 4.51%, and 7.6% offered pay raises of 4.51% to 5%. Another 3.9%, across all employee groups, awarded increases of more than 10% of base pay. Pay raises of more than 10% were awarded to senior management at 7.9% of survey participant organizations, and 3.9% awarded that amount to management-level positions.

At 18.7% and 16.7%, respectively, hourly office and hourly nonoffice were the largest employee groups receiving increases of 2.51% to 3%, and, at 9.2% and 9.5%, respectively, management level and nonmanagement exempt employees are the largest groups receiving 4.51% to 5% increases.

2017 Rate Range Adjustments

On average, 22.3% of employers responding to our survey made adjustments of 2.5% or less to their exempt employee rate ranges, and 16.8% made adjustments of 2.51% to 5% to that same group. Also, 1.3% made adjustments of 5% to 10%, while an average of 1.4% adjusted their exempt ranges by 10% or more. An average of 55.7% (19.6% awarded $0, and 36.1% selected N/A) made no adjustment to exempt salary ranges in 2017.

For hourly workers, an average of 20.7% of responding employers made rate range adjustments of 2.5% or less, and 16.6% made adjustments of 2.51% to 5%, while 0.8% increased the rate range by 5% to 10%. A scant 0.5% made an adjustment above 10%, and 57.4% (19.4% awarded $0, and 38% selected N/A) made no adjustment to their hourly office employees’ rate ranges in 2017.

2017 Biggest Challenge

When asked to describe their biggest challenge in determining 2017 salary increases, 36.9% (down from 38% last year) of survey participants cited budget constraints as the issue. Myriad other challenges were also noted, including:

  • Administering compensation: 14.5%
  • Finding usable market data: 12.5%
  • A competitive salary market: 10.7%
  • Performance management: 8.4%
  • Getting management approval/buy-in: 5.6%
  • Increasing benefits costs: 3.3%
  • Higher minimum wage: 2.8%
  • Economy/revenue uncertainty: 2.3%
  • Maintaining internal equity: 2.3%
  • Union contracts: 1.9%
  • Culture/employee acceptance: 1.4%

 

2017 Bonuses

On average, 50.4% (down from 54.3% last year) paid bonuses to their exempt employees in 2017, with 18.4% (up from 15.7% last year) offering amounts of 5% or less and 31.2% awarding amounts greater than 5%. In comparison, 31.5% (down from 37.9% last year) of those surveyed awarded bonuses to their hourly workers, with 21.6% offering 5% or less and 9.9% awarding amounts above 5%.

A closer look at the details reveals that 30.8% (down from 37.2% last year) gave their senior management team members bonuses above 10% of base pay, and 21.2% (down from 24.5% last year) awarded the remainder of their management team members at that level, while 8.6% (10.6% last year) rewarded their nonmanagement exempt employees with bonuses at the same level. Only 3.4%, however, awarded their hourly office employees bonuses above 10%, and 2.4% of survey participants who answered the question awarded their hourly nonoffice employees bonuses above 10% of their base pay.

A hefty 40.4% (38.9% last year) paid bonuses in addition to salary increases, and 21% (24.5% last year) awarded some of both depending on employee pay type in 2017.

Though the majority (56.9%) isn’t providing them in 2017, lump sum payments are an option for some employers, with13.1% offering up to 5% of base pay and 3% offering from 5.01% to 10% on average across all employee groups.

2018 Merit Increases

Up from 8% last year, 12.5% of survey participants who answered the question have decided and/or approved their pay budgets for 2018, leaving 87.5% undecided as of the end of May. Among employers planning merit increases for 2018, the most common amount is 2.5% to 3% across all employee types.

Of those that have decided, on average across all employee types, 10% (down from 12.3% last year) of employers expect to offer 2018 merit increases of up to 2.5%, and 37% plan to offer merit increases of 2.5% to 5%. An average of 1.3% plan merit increases from 5% to 10%, and 0.6% plan to go over 10%. An average of 50% (up from 44.6% last year) plan no increase (7.8% to award 0%, and 42.2% selected N/A).

The breakdown of employee types shows 8.8% of employers plan merit increases of up to 2.5% for senior management, 10.2% plan that amount for management, 10.6% plan it for nonmanagement salaried exempt employees, 11.1% plan the same for hourly office employees, and 9.3% plan to award up to 2.5% of base pay as an increase to hourly nonoffice employees.

2018 General Increases (Not Tied to Performance)

Of those that have decided their pay budget for 2018, on average across all employee types, 13.6% (down from 17.9% last year) of the employers expect to award general increases of up to 2.5%, 17.5% (up from 15.9% last year) plan to offer general increases of 2.5% to 5%, 0.7% plan to award from 5% to 10%, and 0.2% plan to award general increases of above 10%.

The breakdown of employee types shows 13.1% of employers plan merit increases of up to 2.5% to senior management, management, and nonmanagement exempt employees; 14.1% plan the same for hourly office employees; and 14.6% plan to award up to 2.5% of base pay as a general increase to hourly nonoffice employees.

Among employers planning general increases for 2018, the most common amount is 0.01% to 2.0% for all employee groups (senior management, management, exempt nonmanagement, and hourly employees). At 54.5%, a little over one-half of employers don’t provide general increases, and 12.2% provide them but are budgeting 0% for 2018.

2018 Maximum Individual Increases

Approximately 34% of survey participants indicated their plans for maximum individual increases in 2018. Of that group, on average across all employee types, 12.6% plan to award a maximum increase of up to 2.5%, and 16.6% plan a maximum of 2.51% to 3% as their individual increase, while an average of 18.9% plan individual increases of 3% to 5%, and 6% plan 5.01% to 10% of base pay. Another 1.3% of survey participants are planning individual increases of more than 10% of base pay. At 5.1%, senior management is the largest employee group, receiving individual increases of more than 10%. At 19.3%, hourly office employees is the largest group receiving individual increases of 2.51% to 3%.

2018 Rate Range Adjustments

Of the survey participants answering the question, on average across all employee types, 61.2% plan no rate range adjustments for 2018, 18.1% expect to increase their rate ranges by up to 2.5%, 17.1% expect to make adjustments of 2.51% to 5%, 0.9% plan adjustments of 5.01% to 10%, and 0.6% plan adjustments above 10%. For those planning no adjustment in 2018, an average (across all employee types) of 15.5% plan zero adjustment, and 45.7% selected N/A.

2018 Bonuses

A little over one-third (34%) of survey participants provided information regarding their plans for bonuses in 2018. Of those who did, on average across all employee types, 8% plan to offer bonuses of up to 2.5% of base pay, and 9.8% plan to offer 2.51% to 5%. Another 6.9% plan bonus amounts in 2018 of 5.01% to 10%, and bonus amounts of 10.01% to 25% are planned for an average of 10.1% of the survey participants who answered this question. Senior management will receive bonuses of 10.01% to30% of base pay for 19.5%, and 9.2% will receive 30% or more.

Though 5.5% plan to award bonuses in lieu of pay increases, 36% will award bonuses in addition to salary increases, and 23.5% plan some of both depending on employee type.

Though a whopping 81% have no plans to offer them in 2018, lump sum payments are on deck for some employers, with 12.3% planning to offer up to 5% of base pay and 1.9% planning from 5.01% to 10%, on average across all employee groups.

Pay Practices

The factors used to establish a salary increase budget/pool include company history (5.9%), company profit (42.3%), salary increase surveys (20.9%), the consumer price index (4.1%), and inflation rate (3.2%). The employee-related factors that affect salary increases include merit for 74.7%, job classification for 10.6%, seniority for 2.3%, and department or division for 4.1%.

The amount of bonus or lump sum payment is determined by individual performance for 37%, given across the board for 9%, a combination of individual performance and across the board for 32.3%, company profit for 33.2%, and company performance against budget for 28%.

When it comes to assigning a salary range for a new position, our survey participants use a variety of methods. For example, 55.5% compare the new position to other positions within the company, and 35.8% research competitors’ wages. Also, 52.8% rely on pay rate data within their local market, while 51.8% also research industry and position salary data. Only 16.5%, however, consider the candidate’s previous pay level.

Though 19.9% (practically the same as last year’s 19.8%) of survey participants play no role in setting raises, HR is involved in many aspects of the salary increase process. For example, 42.2% of survey participants who answered this question help supervisors with tough pay decisions, and 45.3% play a major role in deciding the companywide level for raises. Each department’s raises are reviewed by 35.7%, and 21.4% approve each employee’s salary increase. Each employee’s raise is determined by 10.9% of participants, and 21.1% review individual raises but have no veto power. For 14.2%, HR sets the salary increase pool amount for managers to use at their discretion.

To address employee retention problems, 64.3% (up from 56.5% last year) evaluate their pay scale/rate range levels to ensure market competitiveness, and 30.3% evaluate employees for flight risk, addressing pay issues at the individual employee level, while evaluating high-potential employees for flight risk is the norm for 25.4%. No compensation-related problems are the norm for 14.6% (down from 19.1% last year) of survey participants.

2018 Challenges

A number of wage-related issues are on the horizon for survey participants at the end of 2017. Trying to keep up with competitors’ wage rates is a big issue for 40.6%, and budget constraints top the list of issues for 22.5%. Last year, compensation administration was a concern for 6.4% but has jumped to 16.7% this time around.

Legislative changes, specifically increasing minimum wage rates, will be an issue for 5.1% and the rising cost of benefits will be a problem for 2.9%. Low increase amounts are projected to be an issue for 3.6%, and internal equity may be a problem to solve for 2.9%.

 Types of Variable Pay

Up from 47.6% last year, almost two-thirds (59.2%) of survey participants that answered the question offer some form of variable pay. Individual short-term incentives (less than 1 year) are offered by 47% of survey participants who responded to the question, and 38.1% provide long-term incentives (1 year or longer) as well. Companywide short-term incentives are an option for 23.1%, and long-term variable pay is offered by 33.6% (up from 20.7% last year). When it comes to group/team short- and long-term incentives, however, 31.3% offer short-term, and 21.6% (up from 12.6% last year) provide long-term incentives.

The most commonly offered variable pay for nonexempt employees is 401(k) match at 33.3% (up from 23% last year), followed by referral bonus at 26.2%. For exempt employees, it’s sales commission at 29.2%, followed by performance bonus at 24.4%.

Objectives

Last year’s survey revealed that one of the most important reasons why employers provide variable pay is to recognize employee contributions and improve individual performance/productivity.

The higher the employee level, the more important variable pay becomes. For example, when asked how important variable pay is for recruiting and retaining talent, 68% indicate it’s moderately to extremely important for finding and keeping exempt employees onboard. At 55.3%, however, a little over one-half consider it important for recruiting and retaining hourly employees.

Similar to last year, sales commission tops the list of “very effective” variable pay types for 23.4%, followed by performance bonuses for 19%. Performance bonuses top the list of variable pay types that are “effective” at motivating employees to achieve higher levels of performance for 18.2%, followed by sales commission at 12.4%, and recognition award at 10.2%.

Plan Administration

Senior management has primary responsibility for designing and implementing variable pay plans for 35.3%, the HR/Compensation department carries that load for 19.8%, and the management team is involved for 13%.

Updating their variable pay plans is as recent as within the last year for 30.3% and within the last 2 years for 14.2%. Their plans were updated within the last 5 years for 12.3%, and 10% are working with plans that have never been updated.

Measuring the effectiveness of their variable pay plans is an informal gathering of employee opinion for 9% and a formal employee survey for 8%. Employee productivity metrics are the yardstick for 6.9% of survey participants, and 5.9% use employee turnover metrics. Surprisingly, 25% do not measure the effectiveness of their variable pay plans. Additional measurements include organization operating metrics (16.5%) and profit/loss metrics (16.5%).

Plan Payout

Almost one-half (43.5%) cap performance bonuses, and more than one-half (58.4%) cap their 401(k) match. Productivity bonuses are capped by 13.6%, and profit-sharing plans are capped by 9.1% (down from 13.2% last year). Sales commissions (11.7%), quality bonuses (7.8%), retention bonuses (11.7%), and stock options (5.2%) are also capped.

Some level of goal achievement is required before payout is made for most variable pay plans. For performance bonuses, 100% of goal achievement is required by 24.5% (down from 34.1% last year), 75% to 99% achievement is required by 24.5% (up from 22.4% last year), and a goal achievement of less than 75% is required before payout is made for 11.2%. Sales commissions paint a similar picture, with 100% of goal achievement required by 15.3% (down from 21.2% last year), 75% to 99% achievement required by 13.3%, and a goal achievement of less than 75% is required before payout is made for 17.3% (up from 11.8% last year).

Incentive/bonus payout is based on a percentage of base pay tied to employee level for 28.5% and to a mixture of fixed amount and percentage of base pay, both tied to employee level, for 11.5%. Payout is a mixture of the same fixed amount and percentage of base pay regardless of employee level for 5.5%. Another 5.5% pay a fixed amount on the basis of employee level.

Participants

A total of 575 individuals participated in this survey, which was conducted in May 2017. Of those who identified themselves, 59.3% are private for-profit, 20.4% are private not-for-profit, 9% are public corporations, and 11.3% are government entities.

Companies with 1–250 employees are represented by 62.1% of survey participants, and organizations with 251–500 workers account for 12.3%. Organizations with 501–1,000 employees are represented by 7.4% of survey participants, those with 1,001–5,000 are represented by 11.6%, and organizations with more than 5,000 employees account for 6.9% of survey participants.

Almost one-half (44.4%) of the participants are in service industries; 17.8% identify as health care and social assistance; 19.6% are in agriculture, forestry, construction, manufacturing, or mining; 6.8% are in wholesale, retail, transportation, or warehousing; 3.4% are in real estate or utilities; and 8% are in public administration.

Staff-level employees account for 14% of the survey participants who self-identified. Supervisors account for 4.4%, and managers account for 37%. Director-level employees make up 30.4%, and vice president or higher finish out the field at 13.8%.

For a more in-depth report, with a complete set of charts containing all of the survey’s data, click here.