Average salary increases for 2003 were 3.4% for salaried exempt employees, 3.3% for salaried nonexempt employees, 3.3% for nonunion hourly workers and 3.5% for executives. Looking ahead, the forecast is only slightly better in 2004, with estimated increases of 3.6% for exempt employees, 3.5% for nonexempt employees, 3.5% for nonunion hourly workers and 3.7% for executives, according to Hewitt Associates’ US Salary Increase Survey.

While increases pale in comparison from the recent high-level mark of 2001 – when base salary increases were 4.3% for salaried exempt employees and 4.5% for executives –the low salary increases are tempered with inflationary numbers that arerunning almost a point less than salary increase budgets.

The Conference Board, which earlier released similar salary budget projections (See Conference Board: Salary Budgets At 3.5% in 2003 ) is projecting a 2.6% rise in the Consumer Price Index for 2003 compared with a 3.5% average salary budget. Additionally, WorldatWork is projecting a 3.5% salary increase in 2003 (SeeWorldAtWork: Salary Budgets At 3.5% in 2003) and Mercer showed 3.3% increases (See Mercer: Pay Increases at 3.3% in 2003, 3.5% in 2004 ).These numbers are encouraging for employers that are trying to avoid a “double whammy” of declining salary increases and rising inflation.

Hewitt found inflationary numbers were not the main motivation for the overall salary increases. Rather, t he factors that have the greatest impact/influence on base salary spending for companies include:

• position in the marketplace (74%)
• internal cost control (69%)
• the economy (60%)
• talent attraction/retention issues (48%).

Regional Variations

In 2003, the highest increases among salaried exempt employees were recorded in our nation’s capital at 3.9% for 2003 and are likewise projected to be the highest in the land at 4.2% in 2004. This was followed by similarly higher than average increases on the other Gulf coast in Houston of 3.7% in 2003. However, the Bayou City could not hold onto the high projections in 2004, when it fell to just 3.5%. Otherwise, salary increases cities across the country in 2003 and projections in 2004 looked like:

• Minneapolis/St. Paul – 3.6% 2003; 3.6% 2004
• Los Angeles – 3.6% 2003; 4.0% 2004
• San Francisco – 3.5% 2003; 3.7% 2004
• New York City – 3.5% 2003; 3.8% 2004
• Chicago – 3.4% 2003; 3.6% 2004
• Philadelphia – 3.4% 2003; 3.5% 2004
• Atlanta – 3.4% 2003; 3.4% 2004
• Dallas – 3.3% 2003; 3.4% 2004
• Milwaukee – 3.2% 2003; 3.6% 2004
• Boston – 2.9% 2003; 3.5% 2004.

“The cost of living may be one of the factors that salary increases in certain cities are higher than the national average,” said Hewitt’s Ken Abosch. “However, because companies are focused on tighter fiscal control these days, I don’t think we’ll see salary averages in most areas vary too greatly from the national numbers.”

Variable Pay

While companies continue to offer variable pay – a performance-related award that must be re-earned each year and does not permanently increase base salary – they are cutting back on the amount of spending. Nearly eight of 10 (77%) of surveyed organizations currently have at least one type of broad-based variable pay plan in place, which is not surprising when the same number (77%) of the responding companies believe the use of variable pay programs helps improve their business results.

However, company spending on variable pay for salaried exempt employees dropped to an average of 8.8% of payroll in 2003 and is expected to reach only 9% of payroll in 2004. Specifically, Hewitt’s study shows that the most common types of variable pay plans in 2003 were:

• 59% – business incentives
• 55% – special recognition
• 47% – individual performance
• 32% – stock ownership.

“Variable pay programs are designed to benefit both the employee and employer,” said Abosch. “However, there needs to be rigor around monitoring the goals and objectives of these programs, and communicating where the company and individual employees stand compared to the goals. Without this discipline, variable pay programs are destined to fail. Conversely, if the program is executed correctly, employees can be very goal-focused and motivated to meet and exceed their objectives, and thus maximize their variable pay potential. In this economy especially, successful variable pay programs can be an important factor in company success.”

Copies of the US Salary Increase Survey are available through www.totalcompensationcenter.com , or by calling the Hewitt Associates Publications Desk at (847) 295-5000.