Benefits and Compensation

How Big (or Small) Are 2007 Pay Increases?

Despite a generally healthy economy, pay increases are backpedaling. What’s taking their place as motivation? Can you say, “variable pay”?

The talent war may be raging, but the big guns that often win recruitment, retention, and worker motivation – significantly larger paychecks – have yet to be brought into the action.

That was the key finding of the 2007 edition of the annual BLR Pay Budget Survey, in which a national response group of 1,100 businesses reported their pay increase plans for the coming year. During this season, when budgets are traditionally drawn up, we thought you’d like to know where things stand.

The 4 Percent Barrier

Looked at nationally, exempt employees can expect merit increases of some 3.8 percent next year, and general increases of about 3.4 percent. Their nonexempt colleagues in the office fare a little lower, with merit raises projected at 3.6 percent, and general increases at 3.3 percent. Despite a generally healthy economy, these figures are actually down a bit from last year, when exempts, for example, were planned for 4 percent raises.

Nonunionized plant workers will actually do a bit better than their counterparts in the office in 2007, with merit increases projected at 3.7% and general increases at 3.5. That leaves unionized plant operatives needing to sharpen their negotiating skills (or perhaps slow outsourcing of their work) if they want to keep up. Union merit increases are planned at only 3.2 percent, while their general increases trail all groups at 2.9 percent.

Looked at geographically, the greatest planned increases are found in the Central, Rocky Mountain, and Southwest regions, where union plant employees (yes, the same class that lags nationally) are looking at a 4.6 percent merit increase. Drawing that average back down were union plant workers in the East Central region, where projected merit increases were only 2.8 percent.

The Variable Pay Solution

Are you an exempt employee seeking to collar the greatest merit increase? You may want to look for a job in research and development (up 4.8 percent) or education (up 4.2 percent). You’ll want to work for a smaller company, as well. Those with fewer than 100 workers scored the largest increases at 4.0 percent. Bringing up the rear for exempts in merit increases was government at 3.1 percent, despite rising state and local taxes.

If companies are not using large merit or general pay increases to motivate workers, what are they using? According to a Hewitt Associates study of 1,028 large organizations representing nearly 500 million workers, the answer is variable pay … in the form of bonuses, equity, and other rewards, often tied to achieving specific business objectives. These do not become part of the base salary, but must be earned anew each year.

“Variable pay is a win-win as employers can reward employees, yet drive business results,” says Hewitt official Ken Abosch. “Employees like them because they feel they have more control than they do in earning base salary increases.”

Proof that somebody likes them comes in the increased incidence of variable pay plans in recent years. In 1991, only 51 percent of companies had such plans. Now 80 percent have them.

What’s the average payout? In 2006, says Hewitt, companies stacked an additional 11.2 percent of payroll onto their budgets as variable pay. Next year, they’re budgeting variable pay at 11 percent of payroll.

Local Results May Differ

In considering these results, remember that your compensation decisions also need to factor in what’s happening in your specific local market and industry niche. The BLR product that provides such localized data, the Employee Compensation in [Your State] program, is available on a no-cost trial basis for up to 30 days. If you’re doing budgeting, there may be no better time to try it than right now.

Visit us at or call 800-727-5257 and we’ll be happy to make the arrangements at no risk or obligation to purchase.

For more information on the Employee Compensation in Your State program, or to arrange a FREE 30-day trial, click here!

2 thoughts on “How Big (or Small) Are 2007 Pay Increases?”

  1. It’s not clear to me what a “general increase” is. Would that be a cost of living increase? So an exempt employee might expect a merit increase of 3.8% plus a COLA of 3.4%, for a total increase of 7.2% over the year?

  2. Bobbie, thanks for your question.

    A general increase is the same percentage raise given to all workers in that group, workplace, company, etc. It’s not identified as COLA-related, and it’s not usually in addition to a COLA. The fact that everyone gets it and that it’s not based on individual merit is what makes it general.

    Jay Schleifer
    Managing Editor

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