"Increasing cost pressures, coupled with the challenges of attracting and retaining top talent, have contributed to a fundamental shift in the way employees have been -- and will continue to be -- rewarded and motivated," said Ken Abosch, leader of Hewitt's compensation consulting business. "As we've seen over the past few years, companies continue to move away from providing employees with substantial 'across the board' merit increases and instead are focusing their efforts -- and a sizeable amount of their compensation dollars -- on variable pay programs, which enable companies to better manage costs, and at the same time reward employees based on meeting specific performance criteria each year."
Hewitt's survey of 1,007 large organizations reveals that base salary increases for salaried exempt employees will inch up to just 3.8% in 2008, compared with 3.7% this year and 3.6% in 2006. Executive employees are projected to receive increases of 3.9%, compared with 3.7% for salaried non-exempt2 and non-union hourly employees, and just 3.3% for union employees.
However, variable pay bonuses -- or performance-related awards that must be re-earned each year -- are projected to hit a record high in 2008 and could reach more than 12%.
Part of the reason employers are willing to pay higher bonuses is due to the fact that 46% of those surveyed for this study reported problems attracting and retaining employees this year, up from just 37% last year.
Now more than 90% of companies offer at least one type of broad-based variable pay plan, up from 80% in 2006 and just 51% in 1991. In 2007, actual company spending on variable pay as a percentage of payroll was 11.8%, up from just 8.8% in 2003. Spending on variable pay in 2008 is projected to remain strong at 11.6%.
Special recognition awards continue to be the most common award offered by employers (63%), followed by business incentives (59%), individual performance awards (44%), non-executive equity awards (44%) and retention bonuses (38%).
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