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June 24, 2002 Issue

It's Time...2003 Compensation Budget Forecasts

It’s time for Astron Solutions’ 2003 compensation budget forecast. While past years saw this activity happen closer to the fall, many organizations, including our clients, have accelerated the 2003 budgeting process. This may be in response to continued uncertainties from both the war on terrorism and the shaky economy. Sadly, the major survey houses do not provide timely release of their major surveys, making predictions this time of the year more difficult.

Let’s start with 2002. According to Towers Perrin, 2002 national merit increase budgets reduced to 3.5% from 2001’s 4.0%. Hewitt Associates reports employee pay raises averaging 4.0%, down from 2001’s 4.5%. Mercer found that original 2001 estimates for 2002, 4.3%, have been revised down to 3.9%. This leaves us with an average combined consulting firm prediction of 3.8%.

These and other studies report the following industry average annualized salary increase trends, not adjusted for inflation, through the first quarter of 2002:

Healthcare: 5.2%
Finance, Insurance, Real Estate: 3.6%
Banking / Savings & Loans: 7.0%
Manufacturing: 2.2%
Information Technology: 4.9%
Retail: 2.4%

According to the Department of Labor’s annualized quarterly growth rate of the Employment Cost Index for wages, adjusted for inflation, we are experiencing a consistent increase in real wages.

Quarter 4 2000 = 1.3%
Quarter 1 2001 = 0.9%
Quarter 2 2001 = 2.7%
Quarter 3 2001 = 3.4%
Quarter 4 2001 = 2.6%
Quarter 1 2002 = 2.8%

As mentioned in the last Astronology, the Department of Labor points out that continued strong growth in productivity would pass to workers via pay adjustments. How much real wages grow will depend on how the “spoils” of productivity growth are divided among companies (profits), employees (pay), and consumers (price reductions). At the end of Q1 2002, companies retained most of the increased productivity benefit.

This issue also impacts how laid off workers are redistributed throughout different segments of the economy. The national average pay for a Manpower temp is $12.80 an hour, $0.05 less than six months ago. Retail workers experienced a 2.1% inflation adjusted increase in the past 12 months. White-collar workers in manufacturing saw only a 1.9% inflation adjusted increase.

In addition to the economy, direct government intervention in certain industries indirectly influences 2003 budgets. New York is a case in point. The incumbent governor, George Pataki, has taken on the cause of labor in an election year. Earlier this year, the Governor joined hands with the leaders of 1199-SEIU, calling for a special fund to provide salary adjustments for registered nurses. State legislatures and the U.S. Congress have considered legislation to provide additional funds to pay for these adjustments. New York is also considering moving the state minimum wage from $5.15 per hour to $6.75 per hour. Living wage legislation, legislation to override state and federal minimum wage laws at the local level, has gained momentum.

The issue of salary budgets is also an industry issue. Healthcare organizations often provide 6% pay adjustments twice a year to registered nurses. There is now a severe shortage in radiology positions that drives salary adjustments as high or higher than those granted to registered nurses. In one southeastern city, a radiology technologist recently received a 28% base pay adjustment. These adjustments make their way back to us in increased health insurance premiums, impacting total compensation budgeting.

There is pressure to dramatically increase the starting wage of public school teachers. The national average starting pay rate is $27,989. There is a concerted effort under way to have a national starting rate of $40,000. If this occurs, an increase in the tax base will be required.

WalMart, with their expanding distribution center network, has made a commitment to set starting pay rates well above the local community standard. $10.00 an hour for no experience can be found in rural Georgia and Vermont.

So where does this leave us? 2003 will continue the trend of the past 10 years, with 3.5% to 4.0% overall base pay increase budgets. There are no indications that, from an overall standpoint, this will change. As pointed out, we must be watchful of two key influences on salary budgets.

First, industry specific shortages. For example, the shortages experienced by healthcare will continue. This will drive overall healthcare budget levels higher. These levels will remain around 6% for overall compensation budget adjustments - 3.5% for normal increases and 8.5% on average for all market related adjustments.

Human Resource professionals must keep abreast of trends impacting specific jobs unique to their industry. Utilize or create industry based Special Interest Groups (SIGs) to coordinate efforts to collect and analyze more relevant market data. Keep in mind potential anti-trust implications when exploring this alternative.

Second, pressure on increased compensation for entry-level positions. With movements in many states to raise minimum wage levels, living wage ordinances, and the “WalMart” effect, organizations should plan on no less than a 5% adjustment for entry-level positions. This may create compressions issues having a domino effect throughout the organization’s pay system.

In addition, there is growing concern regarding the shrinking supply of workers for many of these entry-level positions. This will have an inflationary impact on starting rates. We recommend becoming active in local chambers of commerce, or SHRM or WorldatWork chapters. Networking provides access to all types of organizations in the local community, thereby fostering understanding of local market influences.

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ISSN Number 1549-0467