Companies are spending the most ever on variable pay for salaried exempt workers, according to Aon Hewitt, as optimism about the economy is tempered by a greater emphasis on risk management.
Funds allocated for incentives, bonuses and cash awards climbed to a non-inflation-adjusted 12.9 percent of payroll spending in 2015, the highest in the 39 years of the US salary increase survey. The growth in variable pay pushed overall compensation, including a 2.9 percent increase in base salaries, to 15.8 percent, also the most for the survey.
“Bonus spending is the highest ever because of the positive economic outlook,” said Ken Abosch, broad-based compensation practice leader at the human resources consultancy.
At the same time, companies are “more aware, more sensitive to a possible shift in the economy, having learned from the 2008 crisis,” he said, causing them to migrate compensation from fixed to variable budget columns.
“Organizations are choosing to mitigate their risks, minimizing fixed costs, and give themselves more flexibility by channeling pay into variable forms,” Abosch told Advisen.
As a proportion of overall compensation, variable pay has exploded from 7.5 percent in 1996. Aon Hewitt’s survey of more than 1,200 service and manufacturing companies in June and July found that the most prevalent programs were signing bonuses (57 percent), business incentives (56 percent), and special recognition awards (48 percent).
The relative growth in variable pay has also coincided with increased legislative and enforcement activity in the wake of the crisis. The pay accounted for 10.8 percent of compensation in 2008.
The Securities and Exchange Commission, completing suggestions for compensation rules under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, proposed this summer that executives at publicly traded companies be required to return incentive-based pay in the event of an accounting restatement.
Also accompanying the trend toward variable pay is the shrinking of base salaries. After dropping to 1.8 percent of total compensation in 2009 from 3.7 percent in 2008, salaries have “normalized,” said Abosch, climbing steadily if slowly to the “high 2 percents.”
“This is uninspiring for most employees, since in the not-too-distant past, increases were above 3 percent,” he said. “But with inflation near zero, employees do have almost 3 percent more purchasing power.”
According to Aon Hewitt’s survey, workers in some US cities can expect to see salary increases higher than the projected national average of 3 percent in 2016.
These cities include Washington, D.C. (3.8 percent), Dallas (3.5 percent), Minneapolis (3.3 percent), and Columbus, Houston and Seattle (3.2 percent). Salary increases in 2016 are expected to be lower than national average in Kansas City (2.7 percent), Rochester (2.9 percent) and Philadelphia and Charlotte (2.8 percent).
Projected spend on variable pay for 2016, at 12.7 percent, shows record highs in some cities also, particularly in Houston (16.5 percent), Boston (16.1 percent) and Minneapolis (13.0 percent).
Industries likely to see the highest salary increases in 2016 include telecommunications (3.4 percent); mining/milling (3.4 percent); insurance (3.2 percent) and automotive (3.2 percent), Aon Hewitt said. Industries with the lowest increases are projected to be energy (2.4 percent); education (2.5 percent); health care (2.6 percent); and forest and paper products/packaging (2.6 percent).
