2003 brings hope for modest pay raises

Average salary increase is budgeted at 4 percent, consultant's study shows


The new year promises to bring modest pay increases even as the economic forecast remains puzzling.

Buck Consultants concluded in its recent survey of U.S. employers that the average 2003 salary increase is budgeted at 4 percent, down only slightly from the previous year's forecast. In 2002, companies forecast a 4.2 percent increase but actually delivered 3.9 percent.

"Economic uncertainty is the underlying factor in compensation planning," said Antoinette Petrucci, a Buck Consultants principal. "If a company isn't making money, it won't hesitate to trim its budget."

Of 702 companies that Buck surveyed, 55.1 percent reported cutting staffing last year; 35 percent said they stopped hiring; and 20.8 percent froze salaries.

Other surveys support Buck's numbers.

The Conference Board's survey of this year's pay plans at 75 major U.S. companies found that salaries are expected to rise 3.5 percent for hourly workers and 3.8 percent for executives. Deloitte & Touche reported that more than half the senior finance and human resources executives at 130 large U.S. companies are keeping pay increases to 3.5 percent this year.

But the news isn't as good in other compensation measures.

One in five companies, 19.9 percent, will not pay bonuses for 2002, compared with 4.6 percent in 2001, according to Buck Consultants.

Most companies wait until an audit is completed before releasing bonuses in the spring.

At the top end of the executive spectrum, 36 percent of Fortune 1,000 companies surveyed by Buck said they'll offer retention bonuses for 2002, averaging $16,250, compared with the 51 percent who paid bonuses for 2001, averaging $22,500.

One-third of participants said they'll pay bonuses at below-target levels, around 9 percent of salary compared with the budgeted 11 percent.

"The trend is for these companies to be more selective in the individuals who receive bonuses so that they can provide retention to the people who make a performance difference for the company," said Roger McArt, a Bucks Consultants principal.

The tumbling economy has consolidated the "pay for performance" concept, as many executives saw a cut in pay as profits dropped. The reduction started in 2001, when many chief executives saw their annual pay shrink for the first time in more than a decade.

McArt said widespread bonuses dissolved in earlier downturns. Executives expect the bonuses to mirror the companies' performance, he added.

But company leaders also worry that not paying bonuses to other employees may send the wrong message, said Phillip Henry of Dallas-based HR Management Consulting Services.

"When you go three years without receiving a bonus, by the fourth year you don't expect it and it's no longer an incentive," he said.

Companies are finding other ways to recognize strong performers or leaders. The Buck survey found that among Fortune 1,000 companies, 69 percent offered hiring bonuses in 2002, compared with 78 percent in 2001. The average hiring bonus for executives was $20,000 in 2002 and $15,000 in 2001.

Mercer Human Resource Consulting studied the compensation payouts of 2001 in the spring of 2002, the last study for which data is available. The survey found that in 2001 some companies that didn't pay bonuses increased the long-term, equity portion of chief executive officer pay. A number of companies gave larger stock option grants. Other firms made discretionary grants to the CEO to reflect the "extraordinary" economic circumstances or changed their bonus formulas outright to ensure a payout.

Buck found that even with the market in an economic slowdown, the use of company stock and stock options as compensation continued to climb in 2002. In fact, nearly 21 percent of companies with an equity compensation plan reported that they lowered the criteria for participation in the past three years.

Of companies expanding their equity plans, 24 percent indicated that participants received fewer options as a result.

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