Workzone: Host of issues factor into impact of raises
The average U.S. worker in the private sector can expect about a 3 percent salary increase in 2013, a little bit more than they received this year, according to compensation consultants.
How much of that workers will keep depends on a host of factors: whether inflation remains under control; whether their employer decides to charge them more for health care benefits; and if a payroll tax break that has boosted paychecks for two years is allowed to expire at the end of the year.
Depending on how those issues play out and where they work, workers may come out ahead or even fall behind.
Aon Hewitt, a Lincolnshire, Ill., human resources consultant, is forecasting an average salary increase of 3 percent next year. Those in education will only get a 2.5 percent increase and government workers can expect 2.6 percent more, but mining and energy workers can expect 3.8 percent and 3.6 percent increases respectively, the firm said.
In addition, more companies are offering performance-based merit increases on top of salary increases. Aon Hewitt said 90 percent of U.S. companies offer bonuses to workers below the executive level and about 75 percent of those that do make all employees eligible.
"We're seeing record high levels of funding for bonuses based on the 37 years we've been tracking the data," said Ken Abosch, Aon Hewitt's compensation practice leader.
Prior to the recession, a 4 percent annual salary increase had been the norm. But the Great Recession had a more severe impact on salaries than previous downturns.
"Companies not only froze pay, they cut pay," Mr. Abosch said, adding that he does not think companies will return to providing more generous salary increases any time soon.
"We think 3 percent is the new 4 percent," Mr. Abosch said.
Just how far ahead 3 percent will leave workers depends on a number of factors, including inflation. The cost of living is increasing 2.2 percent annually, according to the latest government report. The Federal Reserve Board is forecasting that inflation will remain at or below its target rate of 2 percent through 2015.
Health care costs also could eat into salary increases. Companies will pay about 6.5 percent more to provide their workers with health insurance next year, according to a survey conducted this summer by Mercer. Nearly 60 percent of the 2,000 companies the benefits consulting firm polled expected employees to cover a portion of those increases.
While employer health care costs for Pennsylvania employers are expected to increase only 4.4 percent next year, 63 percent of employers said they will ask employees to cover some of the increased costs, said Jerome Shilling, a Mercer business leader responsible for the Pittsburgh and Cleveland region.
He said that while Pennsylvania workers on average have better insurance benefits than the national average, they share less of those costs than employees do nationwide. The average Pennsylvania worker has $106 taken out of his paycheck each month for health insurance versus the national average of $140.
"We've got richer benefits and lower contributions," Mr. Shilling said, a benefit he does not expect will last.
Paying more for health care could mean a smaller retirement fund for many workers. Nearly a third of the workers who were asked to pay more for health care benefits in the last year reduced their contributions to retirement plans, according to the Employee Benefits Research Institute.
Another hit to paychecks could come if Congress allows the Social Security tax deducted from a worker's paycheck to rise from 4.2 percent to 6.2 percent next year. The cut, which provided more than a $100 billion annual windfall to workers, was enacted in 2011 to boost economic growth.
Experts say if the tax break expires, the monthly paycheck of a worker earning $50,000 a year will be about $80 lighter.
Merit or performance-based pay increases may lighten the impact of inflation, rising health care costs and payroll taxes.
Jeff Bacher, a principal with Buck Consultants, said merit raises on top of across-the-board salary raises will help some workers do better than break even. More companies are using performance-based pay to reward their better workers, he said. Top performers might get a 4 to 4.5 percent merit-based pay raise, while poor performers could get less than 1 percent and average workers could get 2 to 3 percent.
Mr. Abosch said companies like the plans because, unlike salaries, bonuses are not fixed costs. A company that does well will have the cash to share some of its success with workers, while there are no costs if a company does poorly.
Employers "are not unwilling to invest in employees. They just want to do it in a way that they are protected," Mr. Abosch said.
He said one group that is less likely to qualify for the bonuses is union workers.
"Unions typically have not been in favor of pay-for-performance arrangements because there's too much management control over them," Mr. Abosch said.
First Published November 25, 2012 12:00 am