As employers wrap up the 4th quarter of 2012, they should be in the process of planning and budgeting for 2013. A significant aspect of the budgeting process is planning for the possibility of 2013 pay increases. The shaky economy has had organizations apprehensive about increasing their overall costs and many businesses have been slow to bring back raises. This is coupled with the fact that unemployment remains high and there is a lot of competition for jobs, which holds back the pressure to significantly increase salaries.
Despite high unemployment, organizations are seeing low turnover which represents a stagnant job market while employers continue to have difficulty recruiting high performing employees with critical skills.
So how should you be budgeting for 2013 pay raises? There are several experts making projections that can help provide a benchmark as you crunch the numbers.
The Social Security Cost of Living Adjustments (COLA) for 2013 is 1.7% which is based on the Consumer Price Index and is used to ensure that Social Security Benefits are not eroded by inflation.
A Mercer Compensation Planning Survey reports that 2013 average pay raises will be 2.9%, and for high performing employees salary increases will remain higher as companies try to retain top talent.
The Hay Group is projecting a 3% pay increase for 2013 which is based on information provided by 350 organizations.
The World at Work salary budget survey suggests a 3.0% salary increase for 2013.
According to Towers Watson, the projected average pay increase for 2013 will be 2.9%.
Looking at what others are predicting should be merely a guide for your organization. Revenue projections, other cost increases and your particular business environment should be the major determining factor when budgeting for pay increases.
The goal of salary increases is to retain your top performing employees so you should be strategic about how budgeted salary dollars are allocated. You want to be sure that your top performers get more of the dollar pool than lower performing employees.
For example, let’s say you budget 3% for salary increases in 2013 and you have 10 employees. If your total salary expense is $500,000 for those 10 employees then your raise pool equals $15,000 (500,000 x .03). The best way to be objective with awarding budgeted salary dollars is to incorporate the raise cycle into the performance management process. This is done by reviewing employee goal completion and performance appraisals. This data allows you to reward your top performers with a higher percentage increase and the lower performers should get less. If most employees fall within the same grading range, use a bell curve to flush out the high and low performers and add a higher percentage increase to the top performers and deduct from the average salary increase for the lower performers. In this example, it could mean a top performer could get 5% (an extra 2% on top of the average 3%) and a low performer could get 1% (2% less than the average 3%). I’m also of the opinion that it is ok to give critically poor performers 0% increase and use those dollars to reward top employees.
Planning for salary increases should be done strategically to ensure employees are rewarded for doing a good job and that budget dollars are available for distribution. Communicating throughout the process is also important in that it helps employees feel valued and engaged. Whether salaries are frozen or 3% has been budgeted for raises, sharing that information with employees eliminates unexpected surprises. There are not a lot of things more discouraging for staff than anticipating a raise and finding out at raise time that there have been no dollars allocated for pay increases. Most employees understand cutbacks and want to help keep the organization in the black which is why communication is so important. Get the employees involved in helping to find solutions.
What percentage pay increase are you projecting for 2013 – have you thought about it?
photo by: Images of Money