LINCOLNSHIRE, Ill. – Despite tighter corporate budgets and continued pressure to mitigate costs, a new survey from Hewitt Associates, a global human resources consulting and outsourcing company, reveals promising news for cash-strapped workers. Unlike last year, most U.S. companies are keeping their compensation budgets intact for 2010, making just minimal changes to salary increases and employee bonuses. In addition, the number of companies planning to freeze or reduce salaries has declined dramatically compared to last year, as companies cautiously anticipate signs of an economic recovery.

Hewitt's survey of 555 large employers reveals that base salary increases for salaried exempt, salaried nonexempt and nonunion hourly employees are expected to be 2.5 percent in 2010, down slightly from companies' original projections of 2.6 percent. Executive employees are now projected to receive increases of 2.4 percent, down from 2.5 percent, and union workers can expect an increase of 2.3 percent, down from 2.6 percent. While 2010 base salary increases have dropped slightly from companies' original projections, these changes are much less drastic than the reductions employers made at this time last year. Hewitt's research showed that in October 2008, employers planned to reduce base salary increases for all employee groups by at least 1 percentage point over their original projections. Actual pay raises for workers in 2009 were 1.8 percent for salaried exempt, 1.4 percent for executives and 2.2 percent for union employees.

Also encouraging, Hewitt's survey shows dramatic decreases in the number of companies planning salary freezes or salary reductions in 2010. While the challenging economy compelled nearly half (48 percent) of companies to freeze salaries in 2009, just 17 percent are considering doing so in 2010. No companies in Hewitt's survey anticipate salary reductions in 2010, compared to 10 percent in 2009.

Variable pay budgets, or performance-based awards that must be re-earned each year, are also expected to shift slightly for most employee groups in 2010. For example, spending on variable pay as a percentage of payroll for salaried exempt workers is now budgeted to be 11.2 percent, down from companies' original projections of 11.7 percent. However, variable pay bonuses for nonunion hourly and union employees are projected to rise from 6.4 percent and 5.4 percent to 6.5 percent and 6.0 percent, respectively.

View Chart—Changes in 2010 Salary Increase and Variable Pay Projections

"Many companies are still finalizing their 2010 compensation budgets, but the good news is that most don't seem to be taking the same types of drastic cost-cutting measures we saw at this time last year," said Ken Abosch, head of Hewitt's North American Broad-Based Compensation Consulting practice. "As organizations remain under enormous pressure to hold down fixed costs, we'll continue to see an emphasis on variable pay approaches. These types of performance-based awards give companies more flexibility, allowing them to adjust payout amounts based on business and personal performance, without being tied to fixed costs associated with base salary increases."

According to Hewitt, variable pay spending as a percentage of payroll has almost doubled in 15 years, from 6.4 percent in 1994 to 11.2 percent in 2009. Of companies that offer a variable pay program, almost two-thirds (64 percent) now have an individual performance component and at least 68 percent plan to increase employee eligibility for these programs in 2010. 

Re-examining Compensation Program Designs in Light of the Economy 
According to Hewitt, the current economic environment provides companies with an ideal opportunity to review their compensation programs and ensure they effectively reward strong performance and business results.

Hewitt's survey found that while most companies tie salary increases (88 percent) to some mix of individual and business performance, few companies go far enough with these programs to differentiate high performers from other workers. In 2009, for example, low-performing salaried exempt workers—presumably workers who did not meet their performance goals—still earned merit increases of 1.6 percent, compared to 2.7 percent for average performers and 4.5 percent for top performers. 

"It's clear that many organizations struggle to differentiate performance messages around base salary increases. But the current economic climate provides a rare window of opportunity for companies to fix their past mistakes by moving to a more effective compensation design approach," said Abosch. "Pay programs should be designed in ways that reward high performers, high potentials, and employees with critical skill sets. This is particularly critical as companies work to retain key talent during the economic recovery."

About Hewitt Associates
Hewitt Associates (NYSE: HEW) provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com.

Maurissa Kanter

,  Hewitt Associates,  (847) 883-1000

MacKenzie Lucas

,  Hewitt Associates,  (847) 883-1000