Budgeting for Salary Increases, CompDoctor October 1999

Question: Our company has been formalizing the budgeting process and we are ready to put the finishing touches on it before it goes to the Board. Because one of our major costs is salaries, it would be nice if we had a better idea of what we should budget for employee salaries. Can you give us any guidance?-B. G.

CompDoctor: B.G., you've made my day. I've been hoping that someone would ask for my Millennium Forecast. (Although I can't imagine why CNN hasn't called. Must be that new 651 area code.)

First, as every good prediction starts with accurate information about the present, I must ask you a few questions:

• What is your business-finance? durable goods manufacturing? business services? health care? Pay in different sectors of the economy can vary widely.
• Are you interested in forecasting pay for executives, or for exempt or non exempt employees as defined by the Fair Labor Standards Act (FLSA)? Different compensation structures are involved in determining the rate of increase in each case.
• Are you concerned with pay levels in one local area, or at business locations throughout the country? Pay often varies with geography.
• Do you want to forecast merit pay increases in addition to salaries? Changes in salary ranges tend to reflect the market as a whole, while merit increases may vary widely by industry or job category and are adjusted at different rates.

So much for simple answers. But then, there's nothing simple about Y2K, and this is my Millennium Forecast, after all.

Keeping in mind that your answers to the questions above will affect your numbers, let me tell you what's going to happen to salaries and merit pay in general, in the Midwest.

Salary structures (the ranges that govern pay at hiring and as people are promoted) will increase by 1.5 percent to 3.9 percent next year. The average increase will be 2.8 percent for non-exempt salaries and 2.9 percent for executive officers. Information technology (IT) jobs will get the larger increases, as will finance and publishing. However, we can anticipate a slightly leaner time for IT pros by the year 2001, as many will have outlived their usefulness as Y2K compliance gurus and fix-its.

Merit pay (pay for performance) will range from 3.1 percent to 5.2 percent of salaries. Companies in the professional services, information services and hospitality industries will fare better than health care, wholesale trade and textile manufacturing companies. Recognize that these differences are the result of changing market demand for employees as well as the financial success of the companies in these industries. Across all industries, the average individual merit pay award will be 4.1 percent of salary for exempt employees and 4 percent of salary for non-exempt employees. Executive rewards will increase at an average pace of 4.2 percent of salary.

That was part one of my forecast. Now here's part two: The trend toward variable pay (pay based at least in part on individual, team or organizational performance) will continue to grow. More and more companies, regardless of size, are adopting variable pay plans for all employees, even hourly workers. Last year, variable pay comprised about 4.5 percent of company payroll budgets for non-exempt employees and about 8 percent for exempt employees.

Stock programs, including stock purchase plans, stock options and grants, also will increase in popularity. In fact, you are already in the minority of companies if you don't have some type of stock program. More private companies, too, will get into the act by offering phantom shares.

Finally, no Millennial Prognostication would be complete without a sense of foreboding, so here's a word of warning. If you build a budget forecast based on outdated salary structures, your forecast will be off just as much as your current ranges are. So before you present your new budget to the Board, you may want to reassess your pay strategies to make sure that they're in line with your business objectives and that they support your company culture.

There you have it. Time to crank up the old abacus and figure out what it will cost you to keep your employees in-house and well-fed for one more year. And by the way, if the increases you bestow next year are minimal, you ought to make sure that the appreciation you express to your people is...well...Millennial.

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