While salary increase budgets remain flat despite a growing economy, a new study by Mercer found that promotional increases are on the rise as employers focus on career progression to retain and engage critical talent.

According to Mercer’s 2015/2016 US Compensation Planning Survey, the average salary increase budget is expected to be 2.9% in 2016, up slightly from the average increase budget of 2.8% in 2015. However, salary increases for top-performing employees—about 7% of the workforce— will be almost twice that of average performers as companies continue to differentiate salary increases based on performance.

“During the recession, employers’ focus shifted from fixed pay to variable pay to control costs. As they have become more comfortable holding the line on fixed cost increases with respect to salary budgets, we’re seeing a steady rise in the use of short-term incentives as a mechanism for rewarding performance to supplement rather low pay raises,” explains Mary Ann Sardone, partner in Mercer’s Talent Practice and regional leader of the firm’s Rewards practice, in a press release.

“In addition, flat budgets have created more reliance on other reward methods such as developing career opportunities and creating meaningful work experiences that align with the company’s goals and support employees’ needs."

Retaining key employees

Pay advancement is evident in other adjustments. Mercer’s survey shows that promotional increases as a percent of base pay are rising, a sign that organizations are looking internally at talent and career progression to retain key employees, rather than risk losing them to competitors.

These increases, which average approximately 8% of pay, vary by job category and consistently rose for all groups. For executives, promotional increases rose to 9.1% of base salary (compared to 8.4% last year), and increases for professionals rose to 7.7% (compared to 6.9% last year).

In addition, 41% of organizations are now budgeting promotional increases separately from merit increases, up from just 36% in 2014. Says Sardone, “Employers are finding ways to deliver pay increases through other means like promotions, which reflects the growing trend of focusing on careers and sustained performance, not a 1-year snapshot and reward.”

Rewarding individual performance

As organizations look for enhanced ways to pay for performance, differentiating salary increases by employee performance continues to be the norm. Companies are rewarding top-performing employees with significantly larger increases than those in the lower-performing categories.

Mercer’s survey shows that the highest-performing employees received average base pay increases of 4.8% in 2015 compared to 2.7% for average performers and 0.2% for the lowest performers. Such increases are expected to continue in 2016.

“In today’s business environment, performance continues to drive pay raises. Companies expect performance and will vary rewards based on individual achievements, organizational success, or both,” Sardone maintains.

Adopting career frameworks

To ensure employee engagement and better manage talent programs, companies are creating the infrastructure for career management through the adoption of career frameworks. According to Mercer’s survey, 40% of organizations currently have a career framework, and 30% of those that do not are planning to implement one.

“A framework for jobs and platform for communicating careers are essential to match employee capabilities with opportunities and talent needs of the organization,” says Sardone.

Mercer’s 2015/2016 US Compensation Planning Survey, conducted annually for more than 25 years, includes responses from 1,504 mid-size and large employers across the United States and reflects pay practices for more than 17 million employees. The survey results were captured for five segments of employees—executive, management, professional (sales and nonsales), office/clerical/technician, and trades/production/service—across multiple industries.

To purchase the survey results, go to www.imercer.com/cps and scroll down to Purchase Options, or call 800-333-3070.