With the nation’s economy in a downward spiral over the last few years, salary budgets have remained in a deep freeze. With the economic picture continuing to show modest signs of improvement, salaries are projected to slowly thaw and trend upward in 2012.

According to a recent survey by the American Society of Employers (ASE), businesses are expecting further gains in the overall economy. With improved cash flow and greater employee productivity, companies are now looking at loosening up their salary budgets in an effort to reward top performers and retain critical talent moving forward. According to the ASE, for the first time since 2008 -2009 merit increases are at or slightly above 3 percent among the businesses that budgeted increases.

The ASE’s findings were consistent with results from the 2011-2012 Culpepper Salary Budget Survey. The Culpepper study, which includes salary budget data from 1,065 participating organizations with employees across 95 countries and 24 international geographic regions, reports that base salary increases in the U.S. are projected to rise from 2.92 percent in 2011 to 3.01 percent in 2012, with most companies budgeting 3.0 percent in 2012.

Other key findings of both studies show that the compensation picture varies by industry:

• The trends for technical employee compensation are slightly higher than other segments Base salary increases in tech sectors such as alternative energy, semiconductor, and Internet/digital content and services sectors are projected to outpace other sectors in 2012.
• In the hospitality sector, hotels are doing much better than they were in the recession, and raises are commonplace now.
• In the construction industry, where work is still slow, some companies are starting to offer raises again, but they are less than 3 percent.
• Healthcare salary increases are also projected to remain modest at slightly less than 3 percent on average across the industry.

Performance Driven Compensation Programs on the Rise

Another important trend in the compensation arena heading into 2012 is the continued emphasis on performance-based pay plans. Studies have shown that the implementation of performance-driven pay programs reached an all-time high in 2011 and are expected to increase further in the year ahead.

With new hiring remaining sluggish, companies are focused on rewarding current employees for their enhanced productivity and retaining the top performers that are critical to running and growing their business. While noncash rewards such as training and new opportunities help retain employees, base pay is still the most important component of the compensation package. Moreover, as the global competition for top talent intensifies, a one-size fits all salary program is slowly becoming a thing of the past.

These factors are driving the rise in differentiated reward programs in which top performers receive compensation that is substantially greater than average performers. According to Mercer’s 2011 Next Generation of Pay for Performance Survey report, more than two-thirds (69 percent) of employers in the U.S. are working to increase differentiation of pay based on performance.

Additionally, the survey shows that organizations’ primary objectives for focusing on pay for performance are to attract and retain top talent, drive specific behaviors or results, and encourage engagement. Other studies show that, while most companies are budgeting for 3.0 percent increase for average performing employees; high performing employees are expected to receive up to a 5.0 percent increase in 2012.

In addition to performance-based compensation, leading organizations are also emphasizing the importance of total rewards programs for their employees, including career development opportunities, meaningful job designs, non-financial recognition and energizing work climates.

As you engage in your 2012 salary planning process in the months ahead, the professionals at PROXUS stand ready to lend valuable advice and counsel. Our Compensation Practice Group excels in the development of performance-based pay programs and can help you create the salary structures which control and manage your labor costs, boost employee productivity, and retain your top talent.