Reality Check: US Comp Execs See Signs of Wage Pressures

WASHINGTON (MNI) - Compensation packages stuck close to forecasts in the third quarter, but some employers are beginning to revise higher their salary-increase budgets going forward, amid tentative signs of hiring and wage pressures in selected industries and regions, according to compensation consultants.

Consultants reported shortages in professional services like law and accounting, in part reflecting the demand for financial reporting personnel amid tightened corporate governance regulation.

The value and number of stock options awards are expected to decrease across industries as employers are forced to expense this form of incentive.

In technology, some compensation executives reported salary increases above those budgeted, while others said outsourcing of jobs to Asia has kept a lid on pay raises.

“We've got a glut of base-pay projects now, which tells us that employers are much more concerned with whether they're adequately paying their people," said Dan Moynihan, a principal at Compensation Resources in Upper Saddle River, N.J. "We can usually measure the economy by the type of projects that come in the door."

He said that some employers are "waking up" and sensing they must reevaluate their approach to pay increases.

"They've been cautious about wage movements the last three to four years and are now concerned they may not have kept up," Moynihan said.  One pharmaceutical client is considering a modest upward adjustment to its budgeted 2006 wage increase of 3.7%, eyeing a figure slightly above 4% "to keep them competitive," he said.

Moynihan said the Northeast is seeing some hiring pressure in professional services like law, consulting and accounting. And in Tallahassee, Fla., where unemployment is under 3.5%, employers are recruiting "a lot" from other regions, he said.

"We're facing a lot of Boomers exiting the market and not enough (generation) X'ers and Ys to go around," Moynihan said.

Hali Croner, president of The Croner Company in Kentfield, Calif., said West Coast employers in online content and services, software gaming and television and cable media are hiring -- and paying up to do so. She expects this local trend to continue.

She said budgets in these niche industries allow for 3-4% raises annually, but many employers are actually paying 1 to 2 percentage points more than that, according to companies surveyed by her company.

"Market data grew faster than people's merit budgets, which indicates that there are hiring problems right now and they're having to pay more," Croner said. "They can't find enough good people."

Several compensation consultants said demand for certified public accountants, tax experts and treasury employees has gotten a decisive boost from ongoing implementation of the Sarbanes-Oxley corporate governance law, which multiplied corporations' financial transparency obligations.

"There's not enough talent to go around in financial reporting areas," Moynihan said.
Rodney Cottrell, president of Corporate Compensation Partners in Sewickley, Penn., outside Pittsburgh, said the Mid-Atlantic area manufacturing and financial services employers he works with are hiring professional positions even while they consolidate plants and workforces. He said he anticipates continued hiring offset by staff reductions in the fourth quarter of 2005.

Wage increases are seen steady at about 3.5% this year and next, he added.

A salary budget increase survey released in August by WorldatWork, a professional association for compensation executives, showed average total salary budget increases of 3.7% in 2005, in line with last year's forecasts for 2005. Companies surveyed projected increases of 3.8% in 2006. Salary increase budgets dropped in 2003 and were "static" in 2004, according to WorldatWork. The data were compiled before the latest spike in oil prices.

Consultants said that, in some regions, any jobs recovery underway is halting, at best.
Cottrell noted plant closings in the Midwest and high-profile woes in the automotive industries. "There are areas of the country that are slower than others," he said. "You can see depressed economies."

Joe Rich, president of Pearl Meyer & Partners, the compensation consulting practice of Clark Consulting, headquartered near Chicago, said a "little slack" remains in the employment picture.

"We can't confuse stock market performance and company performance
with labor market performance," he said.

Rich said hiring among his clients in information technology and
life sciences has been and should continue to be essentially flat, with
the possibility of a modest decline in IT jobs and a slight uptick in
life sciences employment.

Outsourcing of IT jobs to China and India has insured against wage pressures, he added.

"I just don't think you're going to see tremendous wage pressure in either marketplace."
IT employers are "having trouble justifying wage increases of 4% a year," Rich said. "Why continue to increase salaries here when salaries are much lower in China and India? You're looking at salaries that are 20%-40% of U.S. averages. Even if they're increasing at 15% a year (in Asia), they're still a long way from U.S. numbers," he said.
Rich said there is potential for a "squeeze" on the middle and lower levels of the labor market.

"You're going to see modest wage increases continue, but inflation and interest rates are rising," Rich said. Meanwhile, employers see the rising cost of living, but can resist increasing pay because they have other alternatives, including foreign outsourcing and plucking from portions of the IT labor pool that remain on the sidelines.

"The technology market is still down in total employment by roughly 500,000 jobs since the boom," Rich said.

Turning to alternative compensation, Rich said he expects bonuses to be flat this year, compared with small bumps up in 2004.

Cottrell, of Corporate Compensation Partners near Pittsburgh, said manufacturing and financial services employers expect to decrease bonus payouts this year, based on lower-than-forecasted earnings and sales.

Rich, of Illinois-based Pearl Meyer & Partners, said stock options, which publicly held companies must now treat as expenses (private companies must soon follow suit), are likely to be scaled back considerably for all but top-level employees. Employers that rely heavily on stock options stand to lose reported profits with the new reporting requirements for stock options.

"Real wages for a lot of people are going to go down," Rich said. Employers "don't like to do takeaways, and here's a way to do a reduction and blame it on an external force."
Meanwhile, compliance with these and other new regulations could become a "hidden cost" for employers, said Cottrell, of Corporate Compensation Partners near Pittsburgh. Other employment costs he is watching in the coming quarter and year are rising benefits outlays, supplier prices and outsourcing expenses.

Moynihan, of Compensation Resources in New Jersey, said health benefits prices continue to pressure employment costs, and more of the financial burden is being passed on to employees.

Compensation executives said their own business is brightening. Some companies that consolidated their workforces may have downsized their human resources departments too much, said Mae Lon Ding, president of Personnel Systems Associates in Anaheim, Calif.

Sarbanes-Oxley compliance has also created "a lot of work for public companies in documenting their executives' pay and justifying it," she said.

Bob Culmer, president of Fulminata Associates in Dallas, said he has seen "more interest in my services the last three to four months," as new clients in areas as diverse as retail, manufacturing and technology seek to update salary administration programs.

The Labor Department is scheduled to release the Employment Cost Index for the third quarter on Friday at 8:30 a.m. EDT. The median forecast in a Market News International survey of economists called for ECI to rise by 0.8% vs. the third quarter a year ago. ECI rose 0.7% in the second quarter.