In a Gloomy Economy, Why Should Your Company Provide Merit Pay Increases in 2009?

Ever since the late 90's merit pay budgets have been static, averaging about 3.8%, through the dot.com bust up to the economic/financial disaster on Wall Street that we're now enduring with no end in sight. Merit pay budgets projections for 2009 again indicate that all industries combined will offer merit pay budgets just below 4.0%. However, there are differences in merit pay budgets between industries with several industries broken out below to demonstrate this point:

* Business processing & professional services = 5.0%
* Banking, education, durable goods & retail = 3.5%

At first blush, it doesn't make much sense that with inflation on the rise, pay increases are static. With the latest Consumer Price Index (CPI) reported by the Bureau of Labor statistics for Urban Workers as being 5.4%, clearly the average employee is falling further behind financially year after year.

What's worse yet is that with the economic downturn, many employers are downsizing. Job security is of paramount importance to employees because they realize how tough it would be to find another job now. Even before the economic downturn, merit pay wasn't competitive with inflation. But now some companies are finding it difficult to make payroll, let alone consider giving employees a merit pay increase.

The dynamic that has created this environment of lower merit budgets is directly linked to the increase in healthcare costs. The largest line item on every organization's balance sheet is salaries and benefits, easily representing 50% or more of a company's overall expenses.

As companies faced higher health care expenses, they were forced to contain merit pay budgets. As a visual example, think of a company's entire expense for salaries & benefits looking like a pie. Ten years ago, the cost of benefits represented only 3 out of 8 pieces in the pie.....now it represents 6 out of 8 pieces. Hence, less money is available to pay salaries.

Constant salary budgets over the last 8 or 9 years tells us that we are experiencing a stabilized labor market. It means that employers generally can attract and retain the talent they need for their organizations with a total rewards package including modest pay increases. Employers simply haven't had to pay employees more in order to hire and retain quality employees.

Does this mean that your company should skip giving merit increases in 2009? If your company forfeits merit pay increases next year, your employees' actual pay rates will fall further behind those employees in comparable jobs in other organizations who do provide merit increases. So, the answer to this question is " NO," your company should not stop merit increases in 2009. The only exception to this answer is if it is financially impossible for your company to do so.

Particularly if you're a private sector employer, consider that the public sector provides employees with both merit increases AND COLA increases. If you don't give increases, your employees will fall further behind their peers at those organizations.

Once upon a time, the private sector was recognized as offering total rewards packages (benefits and compensation) that were richer than those offered by the public sector. But as merit pay budgets have held constant over time, public sector benefits coupled with cost of living and merit increases have compounded to reverse this conventional wisdom.

Now, it seems that public sector jobs offer richer total rewards packages to offer to employees coupled with job security (which the private sector doesn't offer). Time will tell whether the government will be able to honor the rich retirement and benefits packages they negotiated when the economy was robust. As we all painfully know, some states and cities are operating in a deficit or even going bankrupt.

The economy will rebound over time. When it does, if you have not kept competitive with the market during the downturn you will be at a greater risk of losing your staff. If at all fiscally possible, your best strategy is to provide merit pay increases, particularly if your company doesn't give COLA increases. If you don't, you'll have to play "catch up" down the road, meaning that you'll be giving 10% or 20% increases in pay just to be competitive with companies who didn't pull back on merit increases when the economy was soft. Prudent, deliberate management of merit pay in a fiscally responsible manner is always your best course of action.

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In a Gloomy Economy, Why Should Your Company Provide Merit Pay Increases in 2009?