Talent Management

Tight Labor Market Doesn’t Move Wage Needle

Even with low unemployment and this year's tax windfall, employers are planning essentially flat salary increases for 2019, studies show.
David McCannAugust 16, 2018
Tight Labor Market Doesn’t Move Wage Needle

The labor market is tight. U.S. companies are challenged more than ever to find, win, and retain talent. At the same time, a majority of U.S. companies have extra cash on hand, thanks to the Tax Cuts and Jobs Act.

Despite all that, companies generally are planning to boost their compensation budgets by only the tiniest of increments in 2019, according to two new reports from major human capital advisory firms.

Mercer reported that the average budget for merit salary increases for non-union employees, which has grown at a flat 2.8% each year from 2015 through 2018, will tick up to just 2.9% for next year. The data was derived from a survey of 1,526 organizations.

How Startup CFO Grew Food Company 50% YoY

How Startup CFO Grew Food Company 50% YoY

This case study of JonnyPops’ success highlights the unusual financial and operational strategies that enabled rapid expansion into a crowded and highly competitive frozen treat market. 

A similar trend line was documented by Willis Towers Watson, based on a survey of 814 companies. The firm’s numbers show that exempt, non-management (i.e., professional) employees will receive an average pay hike of 3.1% in 2019, compared with 3.0% this year.

Non-exempt, hourly employees will see pay growth of 3.0%, versus 2.9% in 2018, according to Willis Towers Watson. Raises for management employees and non-exempt salaried employees will stay flat with last year’s 3.1% and 3.0%, respectively. Executives actually will see the rate of increase in their salaries fall, from 3.2% this year to 3.1% in 2019.

As is usually the case with data, these statistics can be viewed in multiple lights.

“After a decade of consistently flat pay raises, we are witnessing a slight uptick as companies are feeling pressure to boost salaries, given the low unemployment rate and the best job market in many years,” said Sandra McLellan, North America rewards business leader at Willis Towers Watson. “A growing number of companies are coming to grips with the fact that employees are more willing to change companies to advance their careers.”

She continued, “While companies have been able to hold the line on raises, the tides are changing. Many companies are establishing slightly larger salary budgets while at the same time focusing on variable pay, such as annual incentives and discretionary bonuses, to recognize and reward their best performers.”

Mercer, by contrast, criticized companies for their tepid pay hikes.

“This should be a ‘golden age’ for American workers” because of low unemployment and the concomitant war for talent, according to a blog post by Lauren Mason, principal, workforce rewards, and Mary Ann Sardone, partner and North America workforce rewards practice leader.

“Talent is critical to business transformation, and how you reward your talent will impact your ability to retain and build the workforce you need to deliver on future business objectives,” they wrote.

However, they added, “current compensation systems are suffering from 10 years of minimal salary increase budgets that are generally being spread through organizations like peanut butter.”

Employees understood the tight budgets in a weak economy, but the economy has improved, Mason and Sardone noted. The proportion of employees who consider their pay to be “fair” has declined to 52% from 57% over the last five years, and those who perceive their pay is aligned with their performance have dropped to 47% from 55%, according to Mercer analyses.

Nonetheless, U.S. salary increase budgets likely will remain relatively flat through 2021, based on current economic projections and 20 years of historical data, according to Mercer.

Many factors are contributing to the flat trend, the bloggers wrote, but three stand out:

Cost containment: As companies have placed more focus on maximizing shareholder value, they’ve focused on reducing costs.

Economic uncertainty: Due to the current political climate, CFOs and other financial leaders continue to be conservative and hold onto cash reserves. Salary increases are not easily reversible, so there’s hesitation to pull the trigger on longer-term fixed costs.

Globalization of labor forces: Wage stagnation is not just a U.S. issue, but a global one. Employers are increasingly able to tap into a global pipeline for talent, which drives wages toward a global equilibrium over time.

A mere 4% of Mercer survey respondents said they will be directing savings generated by the Tax Cuts and Jobs Act into their salary increase budgets. Two-thirds (68%) said they won’t be using tax-windfall dollars for that, while 28% said they’re not anticipating any tax savings as a result of tax reform.

Meanwhile, the discretionary bonuses that McLellan of Willis Towers Watson referred to are generally paid for special projects or one-time achievements, she said.

Those will average 5.9% of salary for exempt employees in 2019, up slightly from this year, according to the firm’s survey.

At the same time, annual performance bonuses, which are generally tied to company or employee performance goals, are projected to hold steady or decline slightly in 2019 for most employee groups, Willis Towers Watson said.