Want a Raise? Don't Count Your Chickens

09/03/02
By: Eric Wahlgren, BusinessWeek Online

The experts see fatter employee paychecks in 2003, but those hikes are likely to be selective and more often based largely on merit.

Surely but slowly, employee compensation is likely to pull out of its tailspin in 2003. Fewer companies -- about 6% -- are planning to freeze pay next year, vs. the 17% that froze at least some salaries this year, according to a recent survey of 1,600 companies by Mercer Human Resource Consulting.

Moreover, Mercer expects base salaries to rise 3.9% next year on average, vs. 2002's 3.8% -- which was the puniest annual increase in a decade. With the consumer price index now running at about 1.5%, pay could rise an historically healthy 2.3% after adjusting for inflation. Still, the anticipated increase will be smaller than in the 1990s, when paychecks typically grew by more than 4% annually, compensation experts say.

MORALE BUSTER. Concern about resentment among the troops is one reason more employers will loosen their purse strings -- albeit just a little -- next year, experts say. "It's very hard on employee morale to have two years with no salary increase," says Jan Koors, a vice-president at Pearl Meyer & Partners, a compensation consulting firm in New York. "Companies that didn't give salary increases last year are going to feel they can't go without for two years in a row."

That doesn't mean employers will feel compelled to play catch-up, either. Rather than give larger raises in 2003, those that skipped increases in 2002 will most likely pretend it never happened. "I don't think we're going to see companies doing 4% plus 4%," says Cynde Coulson, a compensation and human resources expert with professional services firm Resources Connection in Costa Mesa, Calif.

Also, Coulson notes, 2002 was an opportunity for some companies to reel back salaries that got out of hand during the Internet boom of the 1990s. "Companies want to make sure that the salaries they're offering are at the going rate in the marketplace," she says.

BEATS NO PAYCHECK. With many employers yet to see a robust rebound in business, watching expenses -- particularly payroll -- has become especially important. Coulson points out with unemployment hovering near 6%, many workers are relieved simply to be working, placing less pressure on companies to open their wallets. People who get shrunken paychecks -- the case on an inflation-adjusted basis for those who didn't get a raise -- are still better off than those going without any paychecks at all, employers reason.

Pay plans at Kintera, a privately held San Diego software company, typify an approach that will be more common in 2003. The outfit abandoned across-the-board raises in 2002 in favor of adjusting employee salaries that it found to be below standard. Kintera Chief Executive Harry Gruber doubts he'll give companywide pay increases in 2003, because he sees no signs of a quick economic turnaround. But there may be more merit raises. Says Gruber: "We might do some adjustments for people who are outperforming."

That seems to represent a growing trend. About 60% of companies still hand out across-the-board pay hikes, says Dan Moynihan, a principal at consulting firm Compensation Resources in Upper Saddle River, N.J. But a growing number are switching to the pay-for-performance model. Says Moynihan: "Companies are trying to reward stellar performers, as those are the ones you can least afford to lose."

THE OPTIONS OPTION. To that end, performance appraisals are becoming more demanding. Increasingly, employees are being "graded on a curve" -- compared with others in their departments or elsewhere in the company -- to make sure managers aren't giving everyone in their teams undeserved "outstanding" ratings and the raises that go with them.

Another way to reward the superstars -- and only the superstars -- will be with stock options. Now that pressure is growing to account for options as expenses, management may become less carefree about granting them. In the future, says Moynihan, "companies will give options [only] to employees who they believe will make the greatest impact."

To keep employees' spirits up, some companies are allowing more casual-dress days or shortened hours over the summer. Another tactic is to give one-time awards that put cash in employee pockets but don't end up as a recurring expense. Still other companies, says Moynihan, are bestowing snazzier titles on employees without boosting their paychecks. One of Moynihan's clients, an accounting firm, surprised its employees by taking the entire workforce to New York City to see a Broadway play on a weekday. "What companies are looking for are ways to keep employees motivated that don't cost a lot of money," he says.

MONEY ISN'T EVERYTHING. Ambitious employees want jobs that not only compensate them well but also provide opportunities for advancement and the chance to learn new skills. Companies that can provide all of those things will continue to attract the best people. And that will matter more as baby boomers begin retiring, leaving a smaller group of less-experienced workers -- the Generation Xers -- to fill their cubicles, compensation experts say.

"When the labor market does turn, employers will probably end up in the same [competition for talent] they were in a few years ago," predicts Coulson. And when that happens, employees will tend to remember how they were treated -- and by whom -- in bad times as well as good.