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Merit Increase Budgets Expected to Hold Steady

Although a tight labor market persists in the United States, many organizations aren’t planning to boost merit increase budgets for 2020. 

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This is according to Mercer’s 2019/2020 US Compensation Planning Survey, which found that just 21% of the more than 1,300 U.S. employers surveyed are increasing merit increase budgets for 2020. Most organizations are opting to keep merit increase budgets the same, as they are 2.9% in 2019, which is up only slightly from 2018, and projected to be 3% in 2020.

“Employers are taking a more holistic ‘employee experience’ view when it comes to investments in the workforce, but the annual merit increase budget is a line item that doesn’t appear to be moving much,” said Mary Ann Sardone, Mercer’s U.S. Talent Solutions Leader. “Investments in other programs related to well-being, career development and technology are getting the attention of employers in an effort to better meet the needs of their employees.”

Mercer’s findings are consistent with WorldatWork’s “2019-2020 Salary Budget Survey,” which found that merit increase budgets for 2019 were reported at 2.9%, a slight shift upward from 2018. Respondents projected an additional 0.1 percentage point increase in 2020 to a mean and median of 3%.

Alison Avalos, CCP, CBP, GRP, WorldatWork’s director of content, agreed that merit budgets are holding steady, but said that organizations continue to send more of that budget allocation toward top performers.

“In 2019, organizations plan to award 50% larger pay increases to high performers over their middle-performing counterparts, which was at 44% just five years ago,” Avalos said.

Mercer’s survey also found that salary increase budgets grew from 3.3% in 2018 to 3.5% in 2019 and is projected to be 3.6% in 2020. The increase is in line with WorldatWork’s findings, but with slightly higher total percentages. WorldatWork’s survey found that salary increase budgets in the U.S. grew to a 3.2% average in 2019 and are projected to be 3.3% in 2020.

“Differences in survey methodologies can contribute to variances in survey findings, but the average salary increase budgets reported in both surveys are in alignment,” Avalos said. “Exceptionally low unemployment, climbing minimum wage rates and increased investments to ensure fair and equitable pay practices are likely to contribute to steady trends in salary budget growth.”

According to additional analysis from other Mercer market compensation surveys, the average base salary adjustment for employees that did not receive a promotion was close to 4% in the 2018/2019 timeframe, indicating that actual increases being delivered on average are higher, but for fewer employees. Data from prior years showed a 3.5% increase on average.

All employee groups saw a year-over-year increase in promotional increases. The average promotional increase received by an employee was 9.3%, climbing 1.5% from last year.

WorldatWork’s data found that while there was no growth in the number of employees receiving promotional increases, the size of the average promotional increase grew to 8.9%.

Other key findings:

  • 54% of organizations budget separately for promotional increases, up from 51% last year. The average promotional budget represented 1.0% of payroll in 2019, down slightly by 0.2% vs. 2018.
  • Organizations continue to differentiate base pay by performance. The majority (90%) still use individual performance to drive base salary adjustments, up from 2018 (88%).
  • A small portion of employers, 14% in 2019, do not use performance ratings. Of those, the majority distribute merit pay based on manager discretion with oversight/review by business leader or HR/compensation group.
  • In 2019, high performers received 1.6x the salary increase of average performers.
  • Most industries are holding steady or experiencing a small uptick in projected 2020 merit increases relative to 2019 increases, specifically energy, high technology and transportation equipment all reporting slightly higher projections.

About the Author

Brett Christie is a staff writer at WorldatWork.


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