The State of Salary Budgets

Good news: Year-over-year salary budgets are projected to increase in the United States in 2014, according to the latest survey data from WorldatWork, an HR compensation research firm.

The bad news: Salary budgets are projected to decline in nearly every other industrialized nation, posing a threat to the future health of compensation increases domestically.

Salary budgets in the U.S. are projected to experience a year-over-year increase of 3.1 percent in 2014, a slight rise from the 2.9 percent increase experienced in 2013, according to the WorldatWork survey data.

Kerry Chou, a senior compensation practice leader at the firm, said the projected salary budget increases are a result of the tepid but still-improving economy — though high unemployment is keeping budgets from increasing even more.

Talent Management spoke with Chou about the projected salary budget figure and the effect the global economy’s woes could have on the U.S. moving forward. The following are edited excerpts of the interview.

According to the latest survey data, salary budgets in the U.S. are projected to rise. What are the main factors contributing to this?
I see the main factor being we’re sort of four or five-plus years on what was supposed to be the upswing from the recession. And in four of the last five years we’ve seen modest increases in salary budgets — the key word being modest.

We were projecting that there was going to be more aggressive budget increases as the economy gained some steam, so it is good news that we are seeing increases. But they are fairly modest — we’re looking at a tenth of a percent, two-tenths of a percent increase year over year. We’re certainly not returning back yet to what we saw before the recession, which was close to 4 percent, so we’re a full percentage point below where we were at before the recession.

I would say that the reason that budgets are going up — albeit modestly — is companies are slowly expanding their businesses, but still being very cautious. I would say in the foreseeable future we’re going to probably see these fairly nominal increases in budgets, but it will take us some time to get back to the types of increases we saw before 2008.

The U.S. was the only country to show a year-over-year increase. What does that mean for the global economy? Could it influence domestic budgets?
The fact that they all went down is something that we should take notice of. It’s certainly a concern. And by and large we would expect the budgets in other countries to behave for much of the same reasons as ours behave, as demand for workers and the economy picks up steam, as there’s higher domestic product coming out of countries. We would expect more hiring, output to go up and, of course, salaries are going to go along with that.

The fact that salaries have fallen in most of the other countries outside the United States indicates that there’s some level of caution and distress going on. I think that has an obvious direct impact on the United States moving forward, since we’re hoping that these other countries are going to be buying our products and there’s so much tighter integration in the world economy now than there was in the past.

What are some ways employers can compensate for retention and motivation aside from salary increases?
I would say organizations should be starting to become more cognizant of the fact that eventually the economy and labor market are going to absorb all these unemployed workers and get people back to work, and then the desire for talent is going to go up to a higher level than it is right now.

But what we see are organizations doing other things. We survey on the prevalence of spot bonuses, on retention bonuses, on project completion bonuses, those types of things. And we have seen an uptick in all of those categories over the past couple of years. In addition to that we’ve seen a fairly marked increase in what we call pay adjustments, or equity adjustments.

These are actual increases to a person’s salary, which kind of happen outside of the normal pay cycle. Somebody might get a counteroffer or an analysis shows that their pay is very low relative to the market and relative to their internal peers. The company may elect to do a onetime out-of-cycle adjustment to their pay, and we’ve seen quite an increase in that type of activity. I think this is an indicator that points out the fact that, although general salary budgets continue to be pretty modest, we do see evidence that sort of key contributors, high performers, critical skill sets, those types of individuals are getting some attention and are getting sort of those one-off adjustments to kind of keep them locked in their current organization.

Are there any other compensation trends talent managers should be aware of?
In terms of the compensation analyst, I think one thing they can do is they can just sort of do an inventory, if you will, on their salary survey sources, because we haven’t had huge growth in average salary levels over the last few years; it’s really a little bit of a lid on a volcano.

I think if we see some company starting to invest in equipment and hire more workers and, assuming our stock market continues its good run right now, that everyone for the past few years has kind of been sort of waiting for everybody else to go in terms of increasing pay. So I think it’s important for organizations to make sure that their data is accurate and that it adequately covers the industries where they’re most likely to attract employees.

Frank Kalman is an associate editor at Talent Management magazine. He can be reached at