Compensation Budgets Expected to Stay Flat in 2017

Despite competition for top talent heating up, new research from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc, shows U.S. employers aren’t planning to spend more on compensation budgets for 2017 — which may likely create a stumbling block for employers when it comes to attracting and retaining high performers.

As noted in a press release, Aon Hewitt’s 2016 U.S. Salary Increase Survey of 1,074 U.S. companies projects base pay is expected to be 3.0% in 2017, up slightly from 2.8% in 2016. Spending on variable pay is expected to be 12.8% of payroll—unchanged from 2016.

“Challenging business conditions and strong global competition this year means many companies are holding the line on compensation spending in the year ahead,” explained Ken Abosch, broad-based compensation leader at Aon Hewitt. “However, as the job market continues to improve, stagnant compensation spending could leave many companies in a difficult position in the war for top talent. Organizations may need to either re-think their compensation strategy, or emphasize the other benefits and perks they provide as a way to attract and retain the best workers.”

According to a separate Aon Hewitt report, more than half (52%) of U.S. workers said they are open to new job opportunities and 44% are actively looking for a new job. One of the main drivers of job-seekers is lackluster compensation. Just 38% of workers feel they are fairly paid, yet 62% said ‘better-than-average pay and benefits’ is a leading workplace differentiator.

More Companies Freeze Pay in 2016

Financial challenges were also reflected in the number of companies that froze salaries in 2016. Aon Hewitt’s research showed 10% of organizations froze salaries, up significantly from 4% in 2015. Of those organizations, one-third were in the energy sector and freezes were applied across all levels including executive, mid-to-senior, junior and hourly workers.

“In order to avoid taking more drastic cost-cutting measures, such as layoffs, some companies turned to salary freezes,” noted Abosch.  “As the economy continues to strengthen and job growth increases in key industries, we expect significantly fewer companies to freeze pay in 2017.”

Salaries by Industry and Geography

Workers in most U.S. cities and across all industries can expect to see salary increases in line with the national average for 2017. However, workers in the education (2.7%), transportation services (2.6%), and oil/gas production (2.4%) industries will experience lower-than-average raises.

Slightly lower-than-average salary increases are also projected for workers in Boston, Dallas/Fort Worth (both 2.8%) and Houston (2.6%).

Workers in some U.S. cities are expected to see higher-than-average variable pay in 2017. These cities include Houston (21.1%), New York City (15.1%), Minneapolis/St. Paul (14.9%) and Chicago (13.7%).

“Variable pay budgets vary by city year over year and depend heavily on the performance of the specific industries that are located within the city as well as the local economic conditions,” explained Abosch. “For example, the energy sector dominates Houston, which was hit with rocky financial performance this year. In 2017, Houston is expected to have the lowest base salary pay increases but the highest variable pay levels in the U.S., which allows these organizations to keep employees engaged and rewarded.”

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