After years of economic struggle, experts are optimistic about the outlook for 2005. While this recent upswing is excellent news for our country’s economic future, employers need to be prepared for the impact that these changes will have on their employee relationships--most significantly, on the issues of recruitment and retention.

According to the Economic Policy Institute’s Economic Snapshot, the current economic recovery, now approaching its third year, remains the most unbalanced on record with respect to the distribution of income gains between corporate profits and labor compensation.  In short, the economy boom of late is translating into higher corporate profits, without increasing the wage and salary income of American workers.  Corporate profits have risen 62.2% since its peak, at odds with an average growth rate of 13.9% where utilizing date from the last eight recoveries of equal or greater length.  This is the fastest rate of profit growth in a recovery since World War I.  On the other hand, total labor compensation has grown only 2.8%, the slowest growth in any recovery since World War II, and well under the historical average of 9.9%.  Growth in total wage and salary income, the primary source of take-home pay for workers, has actually been negative for private-sector workers, -0.6%, versus the 7.2% gain that is the average increase in private wage and salary income at this point in a recovery, based on historical data.

The economic uncertainty after September 11th caused many businesses to institute hiring freezes and rely on their staff to take on extra work, without extra compensation.  The numbers seen in the EPI snapshot reflect recent corporate growth and increased profits without the reciprocity that employees undoubtedly deserve. 

Don’t think employees won’t notice.  In the Workforce article, “Employees are Close to the Breaking Point,”  Tony Lee, editor-in-chief of CareerJournal.com notes, “Once the economy turns around a bit more and you start to see the hiring demand that’s inevitable, you are going to see high turnover rates because of the productivity squeeze.”  In a study conducted by CareerJournal and the Society of Human Resource Management of 300 managerial and executive employees and 451 human resources professionals, 83% polled said it was “extremely likely” or “somewhat likely” that voluntary turnover would rise because of the improving economy.  Of course, as the economy improves, so will the job market.

A recent WorkTrends study echoed these findings.  The HR.com article “WorkTrends Study Shows Leaders Better Work Harder to Retain Talent,” raises concerns that “while employees watch stock market prices going up and Wall Street recovering, they are not seeing their own jobs benefiting.  Employees’ feeling less of a personal connection or loyalty to their company, indicate employees are more likely to actually leave their organization.”

However, it appears that employers are already taking the possibility of high turnover quite seriously.  Mercer’s 2004/2005 US Compensation Planning Survey – Executive Summary reveals that organizations are now realizing the need to focus on attracting and retaining key talent.  Spot cash awards are seeing the most substantial growth in nearly every job family, with nearly 80% of respondents using this method of reward.  In addition, 74% of respondents provide project milestone bonuses and 64% offer signing bonuses.  As the labor market becomes more competitive, so will the recruitment and retention efforts. 

What are the implications for 2005 compensation planning?  Two recent studies may give us a clue to what is ahead for 2005.  The first is a survey released by InfoWorld regarding 2004/2005 compensation trends in the Information Technology profession.  Information Technology compensation trends trend to reflect general economic trends.  The logic is that as the economy expands, the need for competitive IT systems to support the expansion expands as well.  According to their recent study, InfoWorld reports the following:

·        The downward slide of salaries reported in InfoWorld Compensation Surveys in 2002 and 2003 ended in its 2004 survey.

·        Average salaries were down 0.8% in 2004– significant change from the -4.3% drop between 2002 and 2003.

·        Bonuses for IT professionals have increased 51% over 2003 levels.

·        The 4.2% economic growth is putting more pressure on the need for qualified staff.

The first of many general forecasts has been released by Mercer.  This report, covering data from 1,600 organizations, reveals the following:

·        Overall pay increase budgets remain below 4% (3.3% Overall)

·        The number of organizations reporting salary freezes for one or more segments of their employee population fell from 12% to 5% in 2004, with the data further indicating this trend will continue.

·        As a means to develop talent, 19% of companies consider formal career planning.

·        Pay for performance trends continues, with more than half of all employee non-union groups eligible for variable pay awards.

It is clear that the economic recovery, if sustained through 2005, will have an impact on total (pay and benefits) compensation planning for 2005.  The next issue will review select industry implications of the recovery and compensation projections for 2005.

What merit increase budget is your organization planning for 2005?  Be sure to vote in this week's on-line poll!