September 03, 2002 >
Salary freezes factored prominently into U.S. employers' pay increase budgets for 2002 but will be less prevalent in 2003, according to the new 2002/2003 U.S. Compensation Planning Survey from Mercer Human Resource Consulting.

One in six employers (17 percent) froze salaries for some or all employees in 2002, while one in 17 (6 percent) plans no pay increases for some or all employees in 2003.

Mercer says this development is consistent with an overall mood of cautioU.S.ness as U.S. employers set their 2002 and 2003 base pay increase budgets. According to the survey, overall pay increase budgets fell below 4 percent for both years, 3.8 percent in 2002 and 3.9 percent in 2003, down from 4.4 percent in 2001 and 4.2 percent in 2000. When companies with salary freezes (i.e., 0 percent pay increase budgets) are factored into these numbers, they drop to 3.4 percent in 2002 and 3.8 percent in 2003.

More than 1,600 organizations provided data for the survey this year, representing the pay practices that affect more than 15.5 million worker, Mercer reports. Preliminary survey findings, based on the responses of nearly 1,100 employers, were released in June. In addition to pay increase budgets, the survey addresses incentive pay and emerging pay practices.

"During the second quarter, U.S. employers appeared to be expressing some optimism about an economic recovery," says Steven E. Gross, who leads Mercer's compensation consulting in the U.S.. "However, as the economy has remained sluggish and the equity markets have struggled over the summer, employers are reluctant to commit to higher pay increase budgets."

The changing labor market, which has shifted from an undersupply to an oversupply of talent during the economic downturn, also is affecting companies' pay plans.

"During a labor shortage, employers focus externally on what they have to pay to remain competitive with the market," Gross says. "With the softening of the economy, companies now are looking at what they can afford to pay, not just what they have to pay. That's why we're seeing pay variations by industries. Industries that are doing well are paying differently than struggling industries."

Mercer's survey confirms this development: The 2002 pay freezes hit some industries harder than others. Salary freezes/deferrals were most common in the computer software/services and telecommunications industries, while fairly rare in more recession-proof industries such as utilities, health care, and insurance.

According to Gross, in response to the economic downturn, the survey respondents also enacted other cost-cutting measures related to pay. These include workforce reductions, extending the time between pay increases from 12 months to 18 months or longer, reduced work schedules, and voluntary leaves of absence.
"Employers need to make sure their belt-tightening measures don't destroy future business value," he cautions. "As they make these difficult decisions, they should keep in mind their critical business functions and hard-to-replace employees."

Mercer's survey shows little variation in pay increase budgets by geography. The statistics for various. regions of the U.S. (Northeast, Southeast, North Central, South Central, and West Coast) are virtually identical. However, there is variation by industry. For example, employers in the consulting/legal/accounting industry plan average pay increases of 4.5 percent for 2003, while employers in education will raise worker pay an average of 3.4 percent next year.