A Towers Perrin study finds that 65% of companies that froze salary budgets in 2009 will unfreeze them in 2010.
In addition, the median salary increase for employees, excluding those who received no increase at all, will be only about 3% in 2010-an increase relative to 2009 at many companies but down from the nearly 4% median increase seen in the pre-recession days of 2007. Companies also plan to put more emphasis on differentiating the pay increases they do grant as part of their strategy to retain key talent.
"Companies are making an effort to gradually return some sense of normalcy to compensation budgets in the coming year," said Towers Perrin Managing Principal Ravin Jesuthasan. "But in the current environment, 'normal' is a relative concept. Employees coming off a year with no salary increases or bonuses will likely appreciate a small bump in compensation, even if it is noticeably off from pre-recession norms."
In 2009, companies made a number of cuts to employee compensation programs in an effort to reduce expenses and perhaps avoid layoffs. In total, 43% of companies polled froze salary budgets for 2009; 25% cut back on employer 401(k) contributions; and 17% reduced hours worked for some or all employees. For 2010, the plan is to slowly reverse these strategic cuts as businesses take thoughtful actions to balance the competing needs of cost reduction and talent management. In the coming year, just 17% of companies polled plan to have a salary freeze in place and 7% will reinstate salaries across the board.
Employee 401(k) plans should also see modest improvements in 2010. Of all companies polled, 10% plan to increase employer 401(k) contributions in 2010. Among those companies that cut back on the 401(k) match in 2009, 35% are planning to increase their 401(k) contributions next year.
According to the Towers Perrin research, 70% of companies are very or somewhat concerned about losing key talent as a result of the cutbacks made during the recession. Many companies indicated they plan to increase hiring in 2010 and will almost certainly look at competing organizations in their industry or region as a possible source of talent. 2010 will also see an increase in the use of all forms of compensation to keep top talent: 49% of employers plan to use straight salary increases as a retention tool in the recovery; 32% plan to issue cash retention awards; 26% will likely issue stock retention awards, and 25% will use higher bonus payouts.
"The average employee is being hit on multiple fronts," said Jesuthasan. "Many workers lost out on a 2009 merit increase and saw their 401(k) match reduced or eliminated. In 2010, that match may return in some form-but merit increases will be low and provide a percentage bump on a smaller base than would have been the case had salaries not been frozen the prior year."
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