The economic outlook for most industries is strong, with significant demand for goods and services and strong job creation. In 2018, demand for hiring new talent in certain key positions exceeded the available pool of qualified candidates, resulting in modest salary growth. However, organizations are still feeling the pressure to find productivity improvements and keep fixed costs from increasing. With slightly increasing fix costs from higher salaries, many companies are cutting their variable pay budgets in order to reduce their overall total compensation spend.
According to Aon's new 2018 U.S. Salary Increase Survey of 1,026 U.S. companies, base pay budgets are projected to increase to 3.1% in 2019, which marks the highest salary increase since the 2008 recession. While overall salary may be projected to rise in 2019, however, workers in the U.S. shouldn’t expect to bring home more in total cash compensation next year.
Variable Pay Trends
Variable pay — which includes short-term incentive or sign-on bonuses and special recognition awards — is expected to drop from 12.5% to 12.1% of payroll in 2019, the largest drop since 2010, as seen in Figure 1 below. This brings total cash compensation down from 15.5% to 15.2%.
This can seem somewhat counterintuitive given the strength of the economy and the levels of corporate performance being achieved. While variable pay has steadily increased from 2010 to 2015, the second half of the decade signals a reverse of this trend to fund increasing salary budgets.
Employers are viewing compensation holistically and are taking from variable pay to increase salaries. Our data indicates that employers are more willing to offer a higher initial salary to attract talent rather than focusing on the promise of a sizable bonus in the future, which lends itself to a lower total earning potential for employees.
Figure 1 below shows the expected change in total compensation spend from 2018 to 2019.
Year-Over-Year Change in Total Comp Budgets and Spending for Salaried Exempt
As the economy continued to improve from the 2008-09 recession, companies have gotten better at accurately forecasting their salary budgets. Looking at Figure 2 below, overall budgets for salaried exempt employees were 3.0% in 2018, which matched last year’s 2018 projection.
Salary Increase Budget Projections vs. Actual Budget Increases for Salaried Exempt
Other Key Findings from the U.S. Salary Increase Survey
Impact of regulatory changes: We asked new questions this year about the expected impact of new regulatory changes and minimum wage increases on projected salary increase budgets. The vast majority of respondents (99%) do not anticipate changes to minimum wages due to the Tax Cuts and Jobs Act. In light of recent changes in minimum wage requirements, most companies (71%) do not expect a change in salary increase for employees who earn above minimum wage.
Salary increase by geography: Workers in most U.S. cities can expect to see salary increases in line with the national average for 2019. Cities with higher costs of living may see higher increases, such as San Francisco (4%) and Los Angeles (3.7%). Some cities may see higher-than-average increases in variable pay, including Houston (16.5%) and New York City (14.9%).
Salary increase by industry: We see some variation in salary increases when we break it down by industry. For instance, workers in the construction and insurance industries are expected to see higher-than-average salary increases in 2019 at 3.4%, while workers in education and transportation services are expected to see lower-than-average increases at 2.6% and 2.8%, respectively. Variable pay budgets by industry can also vary widely, ranging from 19.1% in the energy industry and 17.5% in food/beverage/tobacco to 5.6% for workers in construction and engineering.
Salary freezes: Less than 1% of the responding organizations reported salary freezes in 2018, or currently expect a salary freeze in 2019.
Short-term broad-based rewards: The vast majority of participants (89%) have at least one broad-based short-term incentive program. Expected spending on variable pay programs in 2018 are at 12.5% of payroll, while variable pay budgets for 2019 are projected at 12.1%. The most relevant types of rewards include business incentives (54%), signing bonus (63%), and special recognition (51%).
Since organizations do not seem to be willing to increase their overall labor expenses, we are observing a small shift in pay mix from variable spending to fixed spending as a response to the hot job market. However, the trend for the last two years has resulted in an overall decrease in total compensation opportunity for employees.
If you’d like to purchase a copy of the full report or have questions for our broad-based compensation experts, please contact us now.