Salary Increases Give Way to Variable Pay Hikes

Salary Increases Give Way to Variable Pay Hikes

Most people are all too aware that annual salary increases have flattened out since the most recent recession. In fact, following each of the past several recessions, salary hikes normalized at a lower level than they had previously.

So it may come as a surprise, to some, that companies’ spending on employee compensation hit record levels in 2015, according to Aon Hewitt. That is, for this year companies allocated a greater percentage of their employee-compensation budget to increases than they have since the consulting firm began tracking compensation data 39 years ago.

What gives?

It’s simply a result of the cost-management mania that has gripped the corporate world for the past six years. A salary increase is a fixed expense that carries forward in perpetuity. On the other hand, compensation vehicles like merit bonuses and incentive-based pay are variable expenses that revert to zero the following year and are also attractive because they generally go only to high performers.

In Aon Hewitt’s new compensation survey of 1,214 organizations, most with annual revenue between $500 million and $10 billion, among those that did bump up compensation spending salary (i.e., they didn’t freeze salaries), increases accounted for 2.9% of this year’s budgeted payroll costs for salaried, exempt employees. That’s down from a consistent 3.6% to 3.7% in the several years before the recession. At the same time, the amount allocated for variable pay hit a record 12.9% of budgeted payroll for such employees, compared with 10.8% in 2008. Altogether, then, 15.8% of overall payroll costs, also a record, was allocated to increases.

Of course, everyone does not share equally in the bounty. A majority of variable compensation is paid in large chunks to executives and other high earners. Variable pay is on the rise for other non-exempt workers too, but the amounts are far less; the share of payroll costs was 6.7% for salaried nonexempt employees and 6.4% for nonunion hourly workers. Read more on CFO.