Companies Cut Back on Merit Pay Hikes

Faced with continued pressure to control costs and raise productivity, major corporations are expected to increase budgets for merit pay by only 3.8% this year--the lowest such increase in 20 years, according to a salary survey released Thursday .

Meanwhile, bonuses and other forms of compensation tied to productivity and performance are continuing to grow in use, according to Towers Perrin, a New York-based management consulting firm that conducts an annual salary survey of companies with revenues of at least $100 million.

More than one-third of the companies surveyed offer variable pay programs, which include lump-sum bonuses to individuals or groups of employees.

Merit pay increases, which usually have little to do with performance, permanently raise an employee’s base salary and often include a cost-of-living adjustment. Performance-based bonuses, on the other hand, do not raise base salary and are given only to employees who meet specific criteria.

“Providing employees with a one-time payment instead of a base salary increase--and thus controlling increases in fixed costs--is becoming more prevalent as a mechanism to control costs,” said Susan Rowland, a principal in the firm.

In fact, during a preliminary survey last year, many companies projected that they would raise merit pay budgets by 4.1% this year. But after budgets were finalized, the rate fell to 3.8% as executives remained cautious about the economy, the survey showed.

Although relatively small, the increase in merit pay exceeds the estimated 2.9% increase in this year’s cost of living, Rowland said.

After growing as much as 10% annually during the inflationary 1970s, merit pay increases began to shrink in the early 1980s as inflationary pressure eased and companies became more cost-conscious.

As a result, workers may no longer depend only on merit pay increases to increase their income noticeably, Rowland said. Instead, many must compete for bonuses to raise their salaries.

“For workers to continue to increase their pay, they have to demonstrate that they added value to an organization,” Rowland said. “It’s not going to be through the regular process.”