Looking to 2014 – Trends in Compensation Planning

Writing an article on 2014 compensation trends in the midst of a government shutdown and its potential devastating impact on the economy is risky. The possibility of slipping into another recession in early 2014 is real, which would alter all current projections dramatically.  However, organizations cannot face the coming year “on hold.”  As such, we consider the future with a cautious eye to the news.
 

In planning for 2014, many data sources are available.  To facilitate our readers’ 2014 strategy development, the following is an executive summary of research, reprinted with permission, conducted by Diane Lustenader, SPHR of Lake Associates, Inc.

2013 Actual Data

US Bureau of Labor Statistics reports actual wage increases over prior 12 months of +2.5%; Surveys report actual 2013 merit increases averaged 2.8-2.9%, all industries.  Inflation YTD = 1.5% so real effect of wages for most employees = +1.0%; +0.7% for hourly workers.  Average structure increase in 2013 was + 2.0% based on review of surveys.  Merit differentiation in 2013 (raises based on performance) ranged from 0% to 9.0%.  The typical differentiation for top performers compared to average performers is a factor of 150% - 200% (i.e. if average raise = 2.9%, top performer average raise = 4.35%-5.8%).  The use of variable pay programs continues to trend upward as a tool in talent acquisition and retention.

2014 Merit Increase Average Forecasts

All Employee Groups, All Industries (merit + non-promotional increases) = 3.0%

Projections by Employee Classification - Production = 2.92%; Office, Clerical + Technical = 2.93%; Exempt = 2.96%; Management + Executives = 3.08%

Merit Differentiation for performance forecast from 0% to 4.6%, similar to 2013 forecast; note actual 2013 data trended higher for top performers

Hot Industries 2014 – Oil & Gas 4.1%, Energy 3.5%, Entertainment 3.4%

Hot Jobs 2014 – medical, information technology

Lagging Industries 2014 – Not-for-Profit 2.4-2.8%, Public Administration 2.6%; Transportation & Warehousing 2.6%, Education 2.5%

2014 Promotional Pool Budget = 1.0-1.3%; average promotional raise forecast = +8.0%

2014 Salary Structure Adjustment = 2.1%

2 years, 2013 + 2014 combo adjustment = 4.1%

2013 Competitive Positioning – Most surveys predict that 2014 will be a year of significant flight risk for all employees, especially for top talent.  Approximately 86% of companies target the 50^th percentile (P50) of the market for the competitive midpoint of their grades and ranges.  For officers/executives that number is 76% with 11% targeting the 75^th percentile (P75).  Less than 5% of companies do not have a competitive positioning philosophy.

2014 CPI Forecast = +1.4%

Unemployment Forecast = 6.8% (much speculation abounds re. impact of government shutdown and debt ceiling debate on this number)

Let’s put this data into perspective.  The following tables are from the Congressional Budget Office, on budget surpluses and deficits since the year 2000, and the Consumer Price Index:

Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (–): 1789–2018
(in millions of dollars)
Year	Total			On-Budget			Off-Budget
	Receipts	Outlays	Surplus or Deficit (–)	Receipts	Outlays	Surplus or Deficit (–)	Receipts	Outlays	Surplus or Deficit (–)
2000	2,025,191	1,788,950	236,241	1,544,607	1,458,185	86,422	480,584	330,765	149,819
2001	1,991,082	1,862,846	128,236	1,483,563	1,516,008	-32,445	507,519	346,838	160,681
2002	1,853,136	2,010,894	-157,758	1,337,815	1,655,232	-317,417	515,321	355,662	159,659
2003	1,782,314	2,159,899	-377,585	1,258,472	1,796,890	-538,418	523,842	363,009	160,833
2004	1,880,114	2,292,841	-412,727	1,345,369	1,913,330	-567,961	534,745	379,511	155,234
2005	2,153,611	2,471,957	-318,346	1,576,135	2,069,746	-493,611	577,476	402,211	175,265
2006	2,406,869	2,655,050	-248,181	1,798,487	2,232,981	-434,494	608,382	422,069	186,313
2007	2,567,985	2,728,686	-160,701	1,932,896	2,275,049	-342,153	635,089	453,637	181,452
2008	2,523,991	2,982,544	-458,553	1,865,945	2,507,793	-641,848	658,046	474,751	183,295
2009	2,104,989	3,517,677	-1,412,688	1,450,980	3,000,661	-1,549,681	654,009	517,016	136,993
2010	2,162,706	3,457,079	-1,294,373	1,531,019	2,902,397	-1,371,378	631,687	554,682	77,005
2011	2,303,466	3,603,059	-1,299,593	1,737,678	3,104,453	-1,366,775	565,788	498,606	67,182
2012	2,450,164	3,537,127	-1,086,963	1,880,663	3,029,539	-1,148,876	569,501	507,588	61,913
2013 estimate	2,712,045	3,684,947	-972,902	2,038,558	3,044,916	-1,006,358	673,487	640,031	33,456
2014 estimate	3,033,618	3,777,807	-744,189	2,294,478	3,062,692	-768,214	739,140	715,115	24,025
2015 estimate	3,331,685	3,908,157	-576,472	2,553,429	3,137,025	-583,596	778,256	771,132	7,124
2016 estimate	3,561,451	4,089,836	-528,385	2,735,891	3,260,397	-524,506	825,560	829,439	-3,879
2017 estimate	3,760,542	4,247,448	-486,906	2,891,827	3,370,159	-478,332	868,715	877,289	-8,574
2018 estimate	3,973,974	4,449,240	-475,266	3,056,516	3,516,155	-459,639	917,458	933,085	-15,627

The national deficit will continue to grow, placing more pressure on the need to increase government revenues.  Yet unemployment will continue to hover around 7%, meaning less tax revenue for the government to count on.  As we have heard in the news the past few weeks, “something has got to give.”  Inflation is holding steady at 2% during 2013 and is predicted to remain as such, or even drop in 2014.  The earlier fears of “hyper-inflation” in 2014 have dissipated. This leads us to a reality check against the data provided by the major consulting firms and compiled by Lake Associates.  Based on discussions with Astron Solutions clients across the country, from differing industry segments, the following can be said as we begin planning for 2014:

• ·         Clients are focusing on a range of 2.8% - 3.2% in their 2014 compensation budget planning, with an average of 3%.  This includes all adjustments to compensation, such as general increases, as well as merit, promotional, and market adjustments.
• ·         Clients are taking a hard look at their centralized compensation systems and moving towards more decentralized models. Such models allow them to make budget decisions based on families of jobs, and prioritize based on the mission critical nature of the positions. This can result in some positions having pay being frozen while others receive adjustments.  This also means increased pressure on developing alternative rewards programs for positions not included in the adjustment.
• ·         Clients are starting to take a hard line in holding pay to the established maximum of the pay range with no adjustment, even a flat dollar amount, until the employee’s pay is below the maximum.  This requires establishing programs to better recognize the long-term employees beyond just a pin or recognition certificate, as this population will be most impacted.
• ·         Clients are also aggressively establishing career progression programs that allow them to reduce the actual start rate below the market going rate.  The organizations then shift these dollars to fund training programs and recognition rewards for those who have mastered their job and exhibit high levels of competency and the ability to take on highly complex job tasks.

Compensation planning for the coming year is always a delicate balance. With the current economic uncertainty, however, formulating a strategy is difficult.  Employers effective at attracting and retaining key talent, however, will utilize multiple approaches that enable them to provide fiscally conservative total rewards packages while still engaging the human capital that drives the organization forward.