2015 Compensation Budgeting Preview

Moving towards 2015, Human Resource professionals are once again faced with many uncertainties that may have a dramatic impact on compensation program administration.  First, there are the mid-term elections in November.  A shift to a Republican majority in both the House and the Senate would create a stalemate in Washington, D.C. in terms of new legislation that would impact human resources, especially compensation program administration.  Second, chaos around the world and the continued threat of terrorism’s impact on the global economy creates an uncertain environment within which we must plan and operate effectively.

United State Economic Forecast for 2015

The key to understanding 2015 compensation budget predictions is to first understand the 2015 economic forecasts. According to Business Insider (http://www.businessinsider.com/ubs-2015-us-gdp-forecasts-2013-10#ixzz3D6YfLSNJ):

"Despite a slow economic recovery through 2013, U.S. growth still is expected to pick up…After currently forecast 3.0% growth in 2014, we now project 2015 growth to also be 3.0%...Central to their accelerating growth thesis is the idea that the fiscal drag will become less and less onerous.  And this will be offset by a Federal Reserve that begins to tighten monetary policy. This is a theme we expect to be common across most economic forecasts. Indeed, UBS's 3% growth expectation represents the median expectation among Wall Street economists. By mid-2015, we expect the Fed to start gradually raising the Federal funds rate to 0.75% by the end of 2015. In this setting, the benchmark yield on the 10-year Treasury note is projected to rise to 3.2% by the end of next year and 3.5% by the end of 2015. UBS warns prolonged fiscal restraint would certainly be bad news. Furthermore, Obamacare could discourage hiring by small businesses.”

United States Compensation Budgeting Forecasts for 2015

With this economic perspective as a backdrop, it is not surprising to see most, if not all, of the major consulting firms and associations with similar predictions for 2015 compensation budgeting. The following is a summary of these predictions.

The Hay Group (www.haygroup.com):

“Hay Group expects the 3 percent median base salary increase to hold steady across most U.S. industries, including chemical, consumer products, financial services, health insurance, industrial goods and utilities. Two sectors, however, have different expectations: Oil and gas industry employees can expect a median base salary increase of 4 percent and Hospital employees can expect an increase of 2 percent for most employee groups. More employers expect to tie reward programs to performance-management practices. These programs include increasing future emphasis on improving variable-pay programs (56 percent of respondents) and improving key non-financial rewards such as career development opportunities (63 percent).”

Mercer (www.mercer.com):

In its latest study, Mercer points to the following five year trend:

Mercer further comments that:

“As organizations strive to balance reward programs with budgets and the need to retain critical talent, they are analyzing key segments of their workforce and concentrating rewards on top performers. Consequently, the range between increases to high-performing employees and those given to lower performing employees continues to widen. Mercer’s survey shows the highest-performing employees received average base pay increases of 4.8% in 2014 compared to 2.6% for average performers and 0.1% for the lowest performers.”

WorldatWork (www.worldatwork.org):

Following is an excerpt from WorldatWork’s latest salary budget survey:

“‘Salary increase budgets will likely remain close to the 3.0 percent mark until market forces require employers to raise wages more aggressively,’ said Alison Avalos, research manager for WorldatWork. ‘Recovering from the recession is no longer driving employers’ salary budget planning. Current salary budget increase amounts are less about a recovery from widespread pay freezes from a few years back and more about the current marketplace not demanding much growth in the size of pay increases for employees.’ Organizations continue to converge on budget amounts between 2 percent and 4 percent, with 85 percent to 90 percent of all organizations landing there, depending on employee category. The percentage of organizations not awarding increases has dropped to 2 percent to 5 percent, fairly close to historical levels.”

Total U.S. Salary Budget Increases
Employee Category	Actual 2014 Mean	Actual 2014 Median	Projected 2015 Mean	Projected 2015 Median
Nonexempt hourly nonunion	2.9%	3.0%	3.0%	3.0%
Nonexempt salaried	3.0%	3.0%	3.0%	3.0%
Exempt salaried	3.0%	3.0%	3.1%	3.0%
Officers/executives	3.0%	3.0%	3.1%	3.0%
All	3.0%	3.0%	3.1%	3.0%
Source: WorldatWork 2014-2015 Salary Budget Survey, preliminary findings.

http://www.shrm.org/hrdisciplines/compensation/articles/pages/2015-salary-budget-forecasts.aspx#sthash.sOv2leaA.dpuf

Astron’s Perspective

One key issue not reflected in these predictions is the compensation budget impact of the move to increase both the national and states’ minimum wages. The following is a summary of the upcoming minimum wage changes scheduled for 2015, as reported by Business & Legal Reports (www.blr.com):

State minimum wage changes effective December 31, 2014:

·         New York: $8.75 (See additional increase effective December 31, 2015)

·         West Virginia: $8.00 (See additional increase effective December 31, 2015)

State minimum wage changes effective January 1, 2015

·         Connecticut: $9.15

·         Hawaii: $7.75

·         Maryland: $8.00 (See additional increase effective July 1, 2015)

·         Massachusetts: $9.00

·         Rhode Island: $9.00

·         Vermont: $9.15

State minimum wage changes effective June 1, 2015

·         Delaware: $8.25

State minimum wage changes effective July 1, 2015

·         Washington, D.C.: $10.50

·         Maryland: $8.25

State minimum wage changes effective August 1, 2015

·         Minnesota: Large employers $9.00; Small employers $7.25

State minimum wage changes effective December 31, 2015

·         New York: $9.00

·         West Virginia: $8.75

The above changes, coupled with the US Federal Minimum Wage for Federal Contract Employees at $10.10 per hour, up from the current $7.25, will have a hidden impact on compensation budgeting.  Increases in federal and state minimum wages create compression and a domino effect on pay grade & range structures.  An organization that had set its lowest pay grade minimum at $7.25, and employers with federal contract workers, will have to raise that grade minimum by $2.85, or 39%. In New York State, the minimum wage on December 2015 will increase (in two steps) from the current $8.00 to $9.00, or 12.5%. Those employees in the lower pay grades will have to have their pay rates adjusted to avoid pay compression.  In addition to the bring to minimum adjustments necessary for employees currently in the lowest pay grade, attention should be paid to the salaries of employees in higher pay grades, to avoid compression with the lowest wage earners.

There’s a lot to keep in mind as you begin your 2015 compensation budgeting.  With the uncertainty both home and abroad, maintaining and updating one’s pay structures is more than a “plug and play” activity.  Rather, employers must keep a strategic perspective, not only on the pay range and annual salary adjustments, but also on the use of variable compensation and pay for performance tools, to effectively reward the truly high performers, the employees who make the difference between an organization going through the motions and organizational success.