Employers plan to stick with moderate pay raises for workers next year and at the same time put more emphasis on one-time payouts and merit bonuses.
Businesses large and small across Michigan that answered a statewide survey this summer planned to budget for average 3 percent merit pay raises for 2017.
The plans by the 231 employers statewide who responded to the survey held relatively consistent with recent years, despite declining unemployment rates across the state.
“Bottom line, it’s more of the same, essentially, with budgeted merit increases,” said Kevin Marrs, vice president of the Livonia-based American Society of Employers, an organization that prepares an annual survey of Michigan members to determine their planned wage adjustments for the coming year.
“This has been the trend now for the last several years, probably the last six or seven years, where we’re seeing the 3-percent average increase. Below that number, it would be tough to reward performance,” Marrs said. “There are pockets (of employees) that are doing better than others, and employers are challenged to spend that money in ways that are going to have the best return.”
In West Michigan, responses to The Employers’ Association’s annual pay trends survey indicate that employers will raise wages and salaries by an average of 3.1 percent next year, which compares to 3.8 percent in 2016.
Meanwhile, just 4 percent of employers planned to freeze wages for 2017, according to the ASE.
Employers responding to the ASE survey noted their key metric in determining raises continues to be employee performance.
A majority of the employers that budgeted for 2017 pay increases plan to steer much of the money toward top performers. That’s a change from a few years ago, when just 14 percent distributed pay increases based on merit.
Additionally, the trend for 3-percent pay raises holds for 2017 as many markets across the state experience low unemployment rates, which as of July registered a seasonally adjusted 5.4 percent statewide, versus 6.4 percent a year earlier.
Despite the downward movement in unemployment rates over the last few years, surveys do not indicate employers will change course in the near future to offer larger annual merit raises, Marrs said. Although employers are competing for talent in a tighter labor market, they need to balance wage levels with how they fit in the broader economy, he said.
“There’s nothing in our data that suggests that there’s intense pressure on employers to increase these merit budgets significantly higher than they currently are,” Marrs said. “The things that they have going for them are obviously the low inflation rates, and it is a global economy. Michigan employers are not only competing with our neighboring states, but we’re competing with companies around the globe, which may be keeping wages somewhat in check.”
A SHIFT TO VARIABLE PAY
Many employers also continue to make use of variable pay programs.
Among survey respondents, 83 percent said they use a variable pay program for at least one employee group. The annual one-time bonus payout for 2017 will average 5 percent of salary for non-exempt hourly non-union employees and for non-exempt salaried staff, and 9 percent for exempt salaried employees.
“It appears the shift toward modest raises and variable pay and reward options is no longer a trend, but a compensation practice that’s here to stay — at least until the next upheaval in the economy or labor markets,” said Mary Corrado, the president and CEO of the American Society of Employers.
Variable pay programs were once used primarily for company executives and officer positions. The practice has been steadily migrating in recent years into professional, administrative and technical positions below the C-suite, Marrs said.
“Employers are looking to motivate staff in more direct ways that make sense,” he said. “They want to try to drive behavior in a certain way and variable pay is one mechanism to do that.”
Using the one-time bonuses not only aligns spending on wages and salaries with achieving goals and objectives, but it also enables employers to fix a cost for one year without carrying that expense into subsequent years and compounding it, Marrs said.
“You’re paying for that increase year over year,” he said. “With a one-time payout based on the performance and certain goals, it doesn’t impact base compensation the way an increase would.”
About 60 percent of the ASE survey respondents came from the manufacturing sector. The rest were service-based companies.