Increased pay projected, despite uncertain markets But if economy falters, wages might be affected

October 26, 1998|By DALLAS MORNING NEWS

Just when many U.S. employees were starting to see fatter paychecks, the pay party could be ending.

Judging from annual fall surveys of pay budgets at major U.S. firms, salaried employees should fare well next year, compensation consultants say. Basic wage increases of about 4.1 percent to 4.4 percent would continue a recent trend to higher real wages -- pay increases minus inflation -- after years of relative wage stagnation.

But the world economic climate has worsened in recent months. In the past several weeks, large employers such as Halliburton Co., Raytheon Co. and Atlantic Richfield Co. have announced layoffs. If conditions continue to deteriorate, all bets could be off.

Manufacturing wages have been affected as the world economy slows, said John Duca, senior economist at the Federal Reserve Bank of Dallas. So has pay at financial firms such as brokerages and banks, which have been hit by the recent stock market turmoil.

But a tight labor market continues to prop up wages in many service industries.

"What we're seeing here is a tale of three economies," Duca said.

Surveys by leading compensation consultants show midsize to large firms plan 1999 merit raises for salaried employees that range from 4.1 percent to 4.4 percent. With inflation at a 1.4 percent annual rate, that's a nice spread, even if prices start rising at 2 percent or 2.5 percent next year, as economists predict.

Hewitt Associates' survey of 1,069 firms showed next year's budgeted raises for salaried employees averaging 4.2 percent, up from 4.1 percent this year. The American Compensation Association polled 2,776 U.S. firms and 176 Canadian companies for a 1999 projection of 4.4 percent. Buck Consultants put the 1999 figure lower and even with the previous year, at 4.1 percent. Watson Wyatt Worldwide's surveyed companies also are budgeting 4.1 percent merit raises for '99.

That's a sharp contrast with 1996, when budgeted increases tracked by Hewitt hit a 10-year low of 3.9 percent for salaried exempt employees. With inflation about 3 percent, that left a slim real gain.

Executives are getting the largest increases, while nonunion hourly workers would fare the worst. Hewitt's survey puts broad increases at 3.9 percent for nonunion hourly employees and 4.4 percent for executives.

A strong upward trend in raises began this year, when companies overspent budgets to lure scarce talent, said Ken Abosch, a compensation expert at Hewitt, a national consulting firm based in Lincolnshire, Ill.

"Historically, salary increase numbers tended to lag what was happening with inflation," he said. "What makes these numbers so startling is that inflation hasn't been on the increase. Inflation has been flat.

"For the first time in a decade, something else is happening. That something else in this case is a tight labor supply," Abosch said.

Consultants' surveys are limited to the relatively large companies they poll. But the federal government's Employment Cost Index, a broad measure of increases in wage and benefit costs, showed the same trend. Wage and benefit costs for all civilian employees were 3.5 percent higher in June than 12 months earlier, the biggest percentage increase in the index since 1993.

Given low inflation and rising wages, this year saw "the biggest spread we've had in 10 years," said Bob Diers, a senior compensation consultant for William M. Mercer Inc. The slightly higher raises budgeted for next year don't look as good in real terms because of expected increases in consumer prices.

With a worsening economy, will employers pull back on those planned increases? Abosch of Hewitt doesn't think so. Many firms had taken a softer business climate into account, he said.

"If the economy continues its downward spiral in an environment of scarcity and tight labor supply, they [employers] will be forced to stay with numbers like these in order to attract and keep employees they need," Abosch said.

But Diers at William Mercer isn't as sure. "Companies may want to examine and retrench a bit," he said, meaning planned salary increases could be scaled back.

Whatever happens to budgeted raises, they're not the whole pay story.

Pay has begun to vary more within job categories, as employers pay top dollar for specific skills, said Bruce Mamary, a principal in the Dallas office of Buck Consultants. This year, "information systems were getting huge increases compared with everyone else," he said.

More widespread use of incentive pay -- from performance bonuses to profit-sharing and stock options -- also has put dollars in employees' pockets.

'Tendency to lay off workers'

Such flexible plans are the first place employees will take a hit as the economy sours, experts said.

"The payoffs in the variable pay plans won't be in the area of 10 percent. They'll be zero, or they'll be 5 percent," said Wallace J. Nichols, the executive director of the American Compensation Association.

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